I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at212-897-9875or emailing himmbelsky@easterneq.com

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

Today is Friday, we’ve got Follow Along Friday. We’re going to be answering questions that you have submitted about the Best Ever Apartment Syndication Book. We’ve got a handful of questions that we have received, that we’ve selected — we’ve got a lot of questions we’ve received, but we’ve selected some and we’re gonna be going through it.

If you are focused on apartment syndication or raising money, or even investing passively in deals, then this will be of interest to you. If not, then stop listening right now and go listen to another episode where we interview someone who isn’t related to that stuff.

Theo Hicks, how do you want to approach it? Do you wanna go ahead and just read the first question?

Theo Hicks: Yeah. So we’re gonna go over six questions. The first question is from David. He said that “In the book, Joe mentions evaluating 200 properties. Does that mean that I need to visit each and every one in person?”

Joe Fairless: Anytime there’s a question about what degree should I do something, I always start out with the ideal scenario, and most of the time, anytime I come across a challenge I always start out with “What’s the ideal scenario?” and then what does reality look like and what’s really practical. What David is referring to is in the book we talk about evaluating 200 properties in the market that you select, that you want to focus on to purchase properties in.

Ideally, you visit all the properties in that market, you go and secret-shop them… So you go in, you pretend you’re renting from them, and you get to know the management process, the customer service, the rents, what’s included in the rent, how they qualify residents, what type of income is required, do they take criminals or not, do they take pets, if so, what are the pet fees…? Ideally, you do all of that in-person for every single property that is a potential purchase for you in that selected market. Not necessarily reality and not necessarily practical, because time is limited, and it would take you a very long time, and it’s not necessarily the best and highest use of your time.

So instead of visiting all the properties in person, although that is ideal, because you definitely would learn the most that way, my suggestion is to visit a sample set of those properties. So if you’re doing 200 properties, then perhaps visit 10%, so 20 or so properties. Visit them in-person, do all the things I just mentioned, and then have a database for you to look at, and hire the web scraper, which we talk about in the book how to do, and look at the numbers and look at the different variables that we’ve outlined in the book, and you’re gonna be able to get good information and good insight based on your personal experience, as well as your secondary research that you put together.

Theo Hicks: The only thing I would add is to — again, the idea is to go and basically in-person evaluate 200 properties… So you’re gonna make your initial list of 200 properties, but keep in mind that once you start reaching out to real estate brokers, for example, one of the ways to win them over is to visit some of their recent sales… So they’ll send you a list of five to ten properties; if you have five to seven brokers, that’s almost 50 properties right there. If you repeat the same exercise with your property management company, that’s another five properties… So you’re already a quarter of the way there with those properties, and as long as you — you know, if you’re gonna do a sample study, then that will be enough, but if you wanna do a combination of both, then you can view 10-20 properties on that list, and then view those properties from your broker and your property management company.

Again, there’s a lot of reasons why you’re doing this, but one of them is for these to be potential deals in the future, that you reach out to the owners… So when you go to these properties, you’re gonna look for something noteworthy, that you can mention when you’re talking to them, and also just kind of give yourself the other benefit of this exercise – it gives you the best understanding of the market you could possibly get, because you’re literally driving around to 200 apartments, as you’re probably hitting a decent amount of the apartments that are actually in that neighborhood. It’s one of the best ways to be an expert.

As Joe mentioned, this could take a while to do, but… In Tampa, I’ve probably looked at at least 75 properties so far, and I spend all day Saturday just looking at properties, basically… Which maybe you can’t do, but it’s kind of just prioritizing your time and figuring out how you can get out there and look at these properties, because… I didn’t know the Tampa market at all, and the whole reason why I know it is because of that exercise that I’ve performed.

Joe Fairless: Yeah. Ultimately, as you said, it’s prioritizing your time. One suggestion would be if you know that your six months away from really getting serious about this stuff – and when I say “this stuff”, apartment syndication, so putting together your own deal… But you’re interested right now; so you’re not serious, but you’re interested – then go do the tours in-person, because you’re able to learn significantly more when you do it in-person, versus just looking at it on a spreadsheet.

So use that time, if you’re not quite ready to do syndication – maybe you don’t have time during the week, but you have time on the weekends, so you need more time to focus on this stuff, maybe you don’t have the money lined up, maybe you don’t have the right team members, or maybe it’s just not a right time for you, then spend the time you do have and go visit these properties, because it will be incredibly valuable for you.

Theo Hicks: That’s a really good point. A lot of people I see on Bigger Pockets, or just in general, when they first become interested in the idea of syndication, they’re not ready to do a deal for at least six months, because they have to work on their education/experience. You can visit 200 properties in six months pretty easily. You’re not gonna be doing much else, besides listening to podcasts, reading books, maybe working with a mentor and working on your business experience… But in the meantime, before things start really picking up, take the time to do this exercise then, rather than waiting until you are actually looking at deals to do that. So yeah, that’s a good point, Joe.

Joe Fairless: Number two.

Theo Hicks: Number two is from Cordell. They say that they’re from California and they want their first deal to be in the Bay Area, so they wanna know if their mentor needs to be located near them, or if they can be remote.

Joe Fairless: Either one. They can be near or remote, and I’m reading this question — Cordell is in Oakland, California… And you want to do a deal in your backyard, basically, in the Bay Area. My suggestion to you is to have a mentor who has purchased in the Bay Area. It’s its own beast; a different type of business model to buy in the Bay Area versus what I do, and most apartment syndicators do buying in the South, South-East, South-West, Mid-West… But not where you’re at; or not the North-East… For the most part. I’m making sweeping generalizations, but for the most part.

And the reason why is because of the type of value-add plays that are available in the areas where most people buy, versus the Bay Area or New York City. So in order for this mentor to be very relevant to you, my suggestion is to have someone who knows the ins and outs of investing in the Bay Area.

Ultimately, before you even approach the mentor, or seek out a mentor, define what you want from the mentor, so that you know what success looks like, and now that you have a plan for what you want out of the relationship, then go seek it out. It will be much easier for you to do it that way, versus not knowing exactly what you want to and have the outcome be with your relationship with the mentor, and you won’t be able to have as good of a relationship or partnership with them.

Theo Hicks: Yeah, but then also just a couple other things about the mentor – make sure that they’re an apartment syndicator, obviously, and that they’re still active, and that they’re successful, which means that they’ve been able to at least meet the return projections on their deals. Then also what to expect from a mentor is that they should be someone who connects you with people that you need for your team, and also should be an ally you can call upon whenever you need help with anything real estate-related or personal-related.

What you should not expect is for them to be your knight in shiny armor who basically does everything for you and you’re magically becoming a multi-million-dollar apartment syndicator in a couple of months. So make sure you set the proper expectations with yourself upfront, too.

Question number three is from John. This will be a quick one that I can answer… He says that “I have a few markets that I’m looking at, and using Joe’s six-step process, which we outlined in chapter 15 of the book for evaluating the market; I am struggling to get to the right areas on the census.gov website, wondering if the site locations have changed since they wrote it. Can you provide actual web links to each of these six areas?”

As of last week – and we are recording this November 29th, 2018 – those links have not changed. I actually did a Syndication School series – series number five, if you go to SyndicationSchoo.com – on that six-step process, I explain how to approach it from a different angle… And one of the free documents you get with that Syndication School episode is the market evaluation template, which also includes the guide to how to fill it out, and that guide includes a link to each of those six factors.

So if you go to SyndicationSchool.com, scroll down to series number five, one of those free documents will include all the links that you’ll need in order to get that data.

But the census.gov website – it depends on your experience with pulling data. I had a job where I pulled a lot of data from things that were a lot more complicated than census.gov, so I was able to navigate the site pretty easily. If you don’t have that experience, it might be a little bit more difficult. I would just go check out that document, series number five, at SyndicationSchool.com, to download that guide.

Joe Fairless: Number four.

Theo Hicks: Number four is from Scott. He asks “When you underwrite a deal, do you have a third-party look at it as well? Yourself, a bank and a third-party. On my first deal, I would like someone to verify my underwriting.”

Joe Fairless: Yeah, good thought process, because I completely agree with you, you should have someone verify your underwriting on your first deal. So your question was when you underwrite a deal, do you have a third-party — so you’re asking about me and our process…? I’m gonna answer the question that you asked, which is what do I do, and then I’m gonna answer the question based on what I suggest you do, since it’s your first deal.

What I do now – and we’re on deal 21 or 22 at this point, syndicated deal number 21 or 22 – we have a team of underwriters, and then my business partner Frank, he created our underwriting document from scratch… He is phenomenal at underwriting, but even with the strength that we have on the team, we always share our underwriting with our property management company prior to getting a deal accepted, because we want them to verify that our assumptions are in line with their assumptions… And then you asked about sharing underwriting with the bank – yeah, the lender always sees the underwriting, but not necessarily prior to making an offer on a property… But it depends on your relationship with your mortgage broker, because you do wanna get a good sense of what the debt will look like on the deal, so you want to share that information with them… But it just depends on how your process unfolds, and how detailed and in-depth you get with the lender, and what stage.

So for you, on your first deal, the minimum amount of people that I recommend looking at it would be three: you, your property management company, and then someone else who you know and trust and is in the business, and you talk to about the deal, who has no vested interest in you closing or not closing the deal. That’s important, because it ties back to alignment of interests. You want them to have no interest at all if you do or don’t do the deal, that way they can look at it from an objective standpoint. If you have to compensate them, compensate them. What do you compensate them – I don’t know; ask them. It might be a lunch, it might $1,000, it might be $200, it might be more, it might be less… I’m not sure. But get at least the management company and an objective third-party who doesn’t care if you close on the deal or not, but has the experience to take a look at our underwriting.

Theo Hicks: That’s solid advice. And then once you actually have the deal under contract, as Joe mentioned, kind of depending on how your process is set up, that’s when the mortgage broker will come into play, but… You will also have other third-parties — not necessarily look at your actual model, but they’ll verify the outputs of your model.

If you go to our blog, thebesteverblog.com, and you look at the Ultimate Guide to Performing Due Diligence on an Apartment Building, you’ll see the ten different reports that will be generated, or that you should have generated, and most of those involve verifying the information that you have in your underwriting models… So those are also third-parties that are looking at at least a portion of your underwriting, and will send you back information that can confirm your budget, confirm your rent premiums, things like that.

Number five is from Barry. Barry said “In the book…” – I think this is actually on the podcast, because he said “or maybe I heard it on the podcast… There are agents that send mailers to find potential sellers. Is this understanding true? How would you approach a broker about doing this?” I’ll answer this question, since he’s asking me…

Joe Fairless: Yup.

Theo Hicks: The agents that send mailers — well, I’m assuming that most real estate brokers are sending mailers for themselves, to get deals that they can list… But for them to send mailers for you – yes, this is true, but it’s not something that is gonna happen instantaneously. I knew the agent for at least 2-3 years before I’ve entertained the idea — we had a really solid personal relationships; I had already done a couple deals with her, so… We do have a few blogs about winning over a broker to your side, but at the end of the day, in my opinion, in order for this strategy to work, you’re gonna have to do at least a deal with them first, as well as have a personal connection where you call them on the phone and talk about your day before you ask them to do such a thing, because it’s gonna be expensive for them to do.

Now, I’m sure they would do it if you paid them, and I’m assuming you’re asking how you can get it done for free… So how do you approach a broker about doing this? Time, and build a personal connection with them, and do a deal with them first.

Joe Fairless: Good stuff.

Theo Hicks: And then lastly, number six is from Richard, and he asks “What is the difference between a joint venture and a syndication?”

Joe Fairless: A security that’s registered with the SEC and a partnership among your business partners, and it is not registered with the SEC. So a syndication is a security, a joint venture is not. A syndication requires a securities attorney, a joint venture does not. A syndication is where you raise money from one investor – I believe it can be even one investor – and there is an expectation that based on your expertise they will make money, and they will not be active in the deal, they will be passive. A joint venture is the opposite of what I’ve just said.

Joe Fairless: Exactly. So if you’re essentially doing a deal where you’re raising money from one or multiple people who that’s all they’re doing, then it’s gonna be a syndication. But if you and someone are teaming up and you’re gonna do half the work, they’re gonna do half the work, and you’re gonna both bring half the money, that’d be a JV.

So those are the six questions. If you’ve read the book and have any other questions, submit them to info@joefairless.com, and once we have 5-6 we’ll do another podcast like this and answer them.

Let’s move on to the trivia question… Last week’s question was “What is the best city to live in for career-focused single women?” We mentioned that it was a city that we would not expect… The answer is Buffalo, New York.

If you are a career-focused single woman, then Buffalo, New York would be a good place to live. I guess if you’re a career-focused single man too, you’d head over to Buffalo. I think Baltimore was also on that list; I think those are the top two, but Buffalo, New York was the answer.

This week’s trivia question is going to be “What is the cheapest state to live in based off of the cost of living?” I know the answer, but Joe doesn’t know the answer, so Joe, what do you think?

Joe Fairless: I see the answer in our document here…

Theo Hicks: Aww… [laughter]

Joe Fairless: I know, that would have been a fun one to guess…

Theo Hicks: Mistake on my part…

Joe Fairless: I’ve been influenced, so I can’t pretend I don’t know and then try and guess what I was going to guess. I’ll have to stay mute on this one.

Theo Hicks: If you submit the answer either on the YouTube video, below, or to info@joefairless, the first person to get it right will get a signed copy of the first Best Real Estate Investing Advice Ever Book, vol.1.

Also, we’ve got the Best Ever conference coming up. I think we’re less than three months away now. That’ll be in Denver, Colorado. In order to purchase your ticket, go to BestEverConference.com. Each week those ticket prices go up, so the sooner you secure your ticket, the less expensive it will be.

This week’s featured speaker is going to be Gene Guarino, who is an assisted living facility expert. He’s actually going to be speaking at the conference, but he’s also going to be hosting a workshop that Sunday as well. His talk and his workshop is gonna be all about how to increase your cashflow by converting a single-family home into an assisted living facility.

Joe Fairless: I think as an attendee of the Best Ever Conference you get in free…?

Theo Hicks: Yeah, yeah.

Joe Fairless: Okay. So you get in free to that workshop on Sunday. One thing when you go to besteverconference.com, when you purchase the ticket, put in the code “take5”, and you’ll get 5% off. As Theo mentioned, ticket prices go up weekly, so buy it today and lock in the cheapest price available right now.

Theo Hicks: And then lastly, we’re gonna do our review of the week, so make sure you pick up a copy of the Best Ever Apartment Syndication Book on Amazon. Leave a review, send us a screenshot to info@joefairless.com and we will send you some apartment syndication goodies, as well as read your review live on the podcast. This week’s review comes from Derek W. Peterson. He said “I’m an active multifamily investor and I have a bookcase full of excellent references on investing in real estate. Many of them are excellent in changing mindset and giving general advice on turning real estate investing into a full-time endeavor, but Joe’s book by far is the most specific in giving detailed instructions. I have read the book in full, and am now following the actionable steps and conducting the market analysis. I love it and highly recommend!”

Joe Fairless: Thank you for that feedback, and everyone, looking forward to continuing the conversation tomorrow. If you have read the Best Ever Apartment Syndication Book, then we’d appreciate a review on Amazon, and we’ll continue to read more reviews from the book.

I hope you have a best ever weekend, and we will talk to you tomorrow.

Joe and Theo are back for the final installment of our four part series about the recently released, Best Ever Apartment Syndication Book. This part is all about securing the funds and executing on your business plan. Hear how they execute their business plans for their investments. I’m positive they will mention at least one strategy you have not heard before.If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at212-897-9875or emailing himmbelsky@easterneq.com

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

Today is Follow Along Friday. We’re gonna be talking about the fourth part of doing an apartment syndication, and if you are just joining us, well, we’ve got three other conversations that I recommend you listen to. The first one was about the experience, how you get the experience you need in order to do a syndication; the second part is money, how you attract private money; the third is deal – how do you attract deals constantly to you, and then how do you run the numbers on those deals… And now the fourth – you’ve successfully done the first three, so you’ve got the experience, you’ve got the money, you’ve got the deals, now how do you actually execute?

Before you can actually execute, you’ve got to actually secure the money, and there are two main components of that. One is debt, and the other is equity. Theo and I are gonna be talking about some ways to secure the debt and the equity, and some things you should think about.

Yesterday I got our book in the mail, and Theo, I’m so proud of this thing. Is this showing up on camera, Theo?

Theo Hicks: Yeah, I can see it.

Joe Fairless: There we go. For everyone listening on the podcast… We’ve got a YouTube channel and you can see it, but it’s something that will be very helpful for a lot of people who — well, I don’t know about a lot of people, because apartment syndication is a very narrowly-focused business model, but for everyone who is doing apartment syndication, I’m confident that it will be very helpful for you.

We’ll kick it off today, and start talking about getting the money.

Theo Hicks: Exactly. As Joe mentioned, at this point in the process you have the deal under contract, and before you close on the deal you need to do two things. Number one, you’re gonna perform due diligence, which we’re not gonna talk about on this episode, because we’ve actually dedicated two podcasts to going over the due diligence… It’s episode 1116 and 1130. In the first one we go over what due diligence documents you need to get, and in the second one we talk about how much it costs… Which is important, of course.

Joe Fairless: Nice work having those episodes handy, Theo. I appreciate that.

Theo Hicks: Thank you. I’ve learned from the best, Joe. And then secondly, why you’re doing that [unintelligible [00:05:24].02] financing for this actual deal. Typically, when you think of real estate, you’ll get that loan from the bank, and then you yourself will fund the down payment. Well, since you’re syndicating this deal, part of the money will still come from the bank, and the other part will come from your passive investors.

In regards to [unintelligible [00:05:42].29] from the bank, there’s a couple of things you need to do in order to accomplish that. This is when you are reaching out to the lender and asking them what type of loan program you can qualify for, and whether or not you or the deal will qualify for financing.

There are four things you need to do. The first thing is you put together a biography; this is a biography for yourself and for everyone else that’s involved in the deal – your management company, if you have a mentor… Anyone who’s involved in the deal, a sponsor – they wanna know who these people are, what their relationship is to you, what their background is, and how all those three together relates to the deal in question.

One of the things that the lender will look at is the actual person they’re loaning to, and they wanna know that this person is gonna be able to execute the business plan, so they can make their money back. They wanna know who’s involved in the deal, so that they can make that decision. So that’s number one, you need bios.

Number two – they’re going to ask you for the financial statements for the actual property. It varies from lender to lender, but generally you’re gonna have to send them the historical profit & loss for the last 12 months to three years (usually 12 months). Then they’re also gonna want a current rent roll for the property.

Sometimes the lender might look at the trailing three months for some things, or the trailing one month for other things, but in general, they’re gonna ask you for those two documents, and then they’re going to essentially underwrite the deal themselves to make sure that going in, the debt service coverage ratio is above a certain threshold, so that they know that you can cover the mortgage payments with the current income.

Joe Fairless: And what are the thresholds that are typical?

Theo Hicks: For agency debt is usually 1,25. Essentially, what that means is that the NOI is 125% of the debt service, so they know that they’re confident in your ability to pay back the debt service, because we’ve got that 25% buffer between the NOI and the debt service. Then for bridge loans, sometimes it’s the same, sometimes it’s 1,1… It kind of just depends on the lender. So these are all things that you wanna ask your mortgage broker or your lender, because it varies… But for agency debt it’s usually 1,25.

Joe Fairless: And what’s agency debt?

Theo Hicks: We’re actually gonna go into it in the second part. So that’s number two. You’re gonna need a profit & loss statement and a rent roll. Number three is they’re also going to want your budget and your business plan. They know how the property is currently operating, but they wanna know how it’s going to be operating after you take over the property, and also what you plan on doing to the property. As a value-add investor, what you’re gonna wanna do is you’re gonna wanna send them your stabilized expenses, you’re gonna send them your stabilized rents and revenue line items, and you’re also gonna wanna send them your capital expenditure budget, so they can review all of that and make sure that, again, once all those are done, [unintelligible [00:08:35].24] accurate, number one, and number two, will you still be able to pay the debt service once the property is stabilized. So that’s number three.

And then finally, they’re also gonna want the personal financial statements from essentially everyone who’s signing on the loan. I actually went through this process a couple of weeks ago, talking to mortgage brokers, and sometimes they’ll want you to send it to them before you have a deal, just to expedite the process, and it’s one less thing you have to do when you actually find a deal.

One of the benefits of doing it beforehand is you can see how much debt you qualified for, based off of your net worth and your liquidity. If you can qualify for a one million dollar loan, but your plan is to buy a ten million dollar property, then you’re gonna have to bring a loan guarantor. A loan guarantor is someone who meets those liquidity and net worth requirements. Usually, their net worth is equal to 100% of the loan balance, and your liquidity is 10% of the loan balance at close. You’ll find that person and they’ll sign the loan, hopefully qualify for the loan, and in return you’ll compensate them either a one-time fee at closing, or a percentage of the general partnership, depending on the type of debt that’s being secured.

Joe Fairless: And/or. It could be both.

Theo Hicks: Yeah.

Joe Fairless: And one thing to mention on the financial statements that are being submitted – not only for a loan guarantor, but anyone who has 20% or more ownership in the deal. So that’s why as general partners, when we send the opportunity out to our private investors, we cap the amount that any one investor can invest at 19% of whatever the equity is.

For example, we’ve got a deal, the equity raise is 21,5 million – we capped it at a little over four million dollars, so that they stayed under the 20% trigger. What it does is it triggers the Know Your Customer Clause with the lender, and then they’re underwritten, and passive investors (at least our passive investors) don’t wanna go through that process, because it defeats the purpose of being passive.

Theo Hicks: Exactly. So for those four things that I mentioned – the biographies, the financial statements for the actual deal, you and/or your loan guarantor financial statements, and then the budget and the business plan… These are all things that you want to at least discuss with your mortgage broker before you actually find the deal. You don’t wanna just do this after you find the deal, send them all the bios, send them all the financial statements…

Also, for your business plan and actual deal financial statements – you can send those to the mortgage broker beforehand as well, so they can tell you ballpark the type of debt you can qualify for. Most of the mortgage brokers I’ve spoken with have had no issue with me sending them all of these things, as long as I don’t do it for every single deal and never close on a deal… You’ve gotta keep that in mind, too.

Joe Fairless: And in addition to financial statements, you’ll want to have your real estate owned schedule complete; that basically shows how much real estate you currently own, and it shows the debt that you have on it, when you bought it, if it’s an apartment building what’s the NOI, who is the loan with, when is the loan due, what percent ownership do you have in the deal, and ultimately what your equity is worth in that deal. You’re gonna be asked that, so you might wanna have that prepared now, than just add t it and update it whenever you do get a deal.

Also, from a liquidity standpoint, they’re gonna wanna see a bank statement within the last 60 days that shows whatever your liquidity is. So if you know you’re gonna be buying a property in the next 4-5 months, just keep that in mind, that you’re gonna need to provide a bank statement for the last 30-6- days of whatever you have, and that’s what you’re gonna be showing them whenever you close… So if you need to be more cash-heavy during that period of time, then approach accordingly.

Theo Hicks: Exactly. So that’s the first part of the financing – the debt from a lender. The second portion is gonna be the money you raise from your passive investors. The rule of thumb for how much money you’re likely going to need to raise – it’ll be approximately 30%-35% of the total project costs. You’re gonna have your LTV and you might have to put 20% down for the actual loan, but you might have to raise additional money for the acquisition fee, for the operating account fund, for closing costs, financing fees, if you pay for renovations out of pocket you need to raise money for that… So a good rule of thumb is 30%-35% of the total project costs.

Now, there are actually two main types of equity that you can raise. I guess these are two different ways you can structure with your investors. Number one is the equity, which is the most common… And that is when you raise capital from passive investors, you offer them a preferred return, and they will participate in the upside of the deal. So there will be some sort of profit split where they will make a percentage of the sales proceeds. That’s number one.

Number two – there’s also a different kind, that is similar to actual debt. In this situation, you’ll raise money from passive investors, but they won’t participate in the upside of the deal, just like a lender isn’t paid in the upside of the deal. Instead, they will receive a higher ongoing return. I’ve actually learned that it’s called a coupon rate. Essentially, they’ll get an interest rate on their money for a specific period of time, whatever you agree to. Then once that period of time is over, you will return the capital to them, whether it’s through a refinance or a supplemental loan. Then you as a syndicator own the deal free and clear.

Now, from my understanding talking to a few mortgage brokers, you can either do one or the other. So you need to have all equity or all debt. Usually, the debt works better if you only have a handful of investors that are investing a lot of money, as opposed to someone who’s investing 50k. But you can also do a combination of the two. You could have the majority of the capital come from a debt investor, let’s say 80%-90%, and then the remaining 10%-20% can be equity investors where you raise 50k here, 100k here from people to fill up the remaining equity.

Basically, what I’m saying is there’s unlimited ways that you can structure these types of deals, so make sure that you are having a conversation with your investor, so you know what types of returns they want and what type of structure they want, and then also have a conversation with your attorney who’s gonna be creating this operating agreement between you and your investors… Because if they are an apartment syndicator specialist, which they should be, they will have experience creating all types of operating agreements, and they can give you an understanding of how to approach it.

I actually had a conversation with a couple of real estate attorneys this past week, and they recommended that we start simple and just start doing the equity, where you offer a preferred return, and then upside in the sale… But as we grow, we could create more and more complicated deal structures based off if we have one big investor, or we find a certain type of deal, things like that. I just wanted to mention that before we get into actually how to secure capital and the process for doing so.

The process for securing capital – we have a four-step process for doing so. The first step after you have the deal under contract is to create an investment summary.

Joe Fairless: Oh, you paused because that was my cue to start talking, wasn’t it? [laughs]

Theo Hicks: Yeah, I did…

Joe Fairless: Alright, I’ll talk about this… But you said you were gonna mention agency debt and bridge debt, and you didn’t talk about those; can you quickly define those two and talk about it?

Theo Hicks: Yeah. Agency debt is essentially permanent long-term financing. This is debt from Fannie Mae or Freddie Mac, and the terms can be 5, 7, 10 or 12 years. This is a set it and forget it debt. So you’ll get your debt, you’ll have preferably a fixed interest rate – sometimes it might be floating – you’ll have a specified LTV and debt service coverage ratio, you’ll get your loan; you won’t pay the same payment for the length of the term, unless of course you get interest-only, which means you’ll be paying a bit less upfront.

The point is that this is a loan that’s longer-term in nature, so based off of how long you’re planning to hold on the property, you’re going to make sure that your loan term is longer than that… So if you plan on holding for five years, you want a loan that’s five or more years; seven years – seven or more years.

A bridge loan, on the other hand, is shorter-term in nature. They can be as low as six months and up to three years, and then you’ll usually have an option to buy extensions of six months to one-year extensions… So it’s possible to extend it out up to five years, but essentially you’re gonna get a bridge loan when the deal doesn’t qualify for permanent financing.

If you remember what I mentioned earlier, it means to have a debt service coverage ratio of 1,25, and it needs to have a — I can’t remember exactly what it is, but it needs to have a certain occupancy rate. I can’t remember exactly what it is. It might have been 80%-85%… But it needs to be above a certain economic occupancy rate, or it won’t qualify for permanent financing. If that’s the case, your other option is a bridge loan, which is shorter-term in nature; it’ll allow you to cover the renovation costs, so instead of it being an LTV (loan-to-value) loan, it will actually be a loan-to-cost loan… So you’ll figure out what the purchase price is, plus all the capital expenditures, and then they’ll fund a percentage of that, and then they’ll provide you with draws for renovations along the way.

But essentially, the main difference is the length, so the agency debt is longer-term in nature… And then number two is the types of deals that qualify for this financing.

If the deal is essentially stabilized, you can qualify for agency debt. If not, a bridge loan is your other option.

Joe Fairless: Yeah, and interest rates will be higher for bridge loans. Your leverage can be lower for bridge loans, so if you were reckless and you wanted to juice your returns, so increase your returns as much as possible for every single deal, you’d just do interest-only bridge loans, and you’d look to exit out in two years, and then you just keep doing that… But the problem is they’re riskier, and you really should do them just for value-add deals.

The one way they’re riskier is let’s say you are doing renovations and your renovations are not going as planned – well, there are certain loan covenants with any loan, things you have to adhere to during the course of ownership in order to continue to be in good standing with the lender… And with a bridge loan, as Theo mentioned, you are not receiving the cap-ex funds at the beginning, but rather you’re receiving them in draw periods, just like a fix and flipper would receive it from a private money lender. They show that they did the works, and pictures, and they show reports, and proof of the work being done, and then you get reimbursed.

Well, on an apartment community, if things aren’t going as planned or you have a downturn in the economy or whatever takes place – any number of circumstances can take place – and your occupancy dips below a certain level, or your debt service coverage ratio dips below whatever level, or collections dips below a certain level (whatever the covenants are in place with the lender), well guess what? They’re not gonna send you the money to reimburse you for the work that you’ve done, and that’s a huge problem for you. You’re gonna have to either front the money, or you’re gonna have to do a capital call, or you’re gonna let the project sink. So there’s more risk involved with a bridge loan, significantly more risk. So while you can get higher returns, there’s significantly more risk involved, so you’ll wanna be very judicious with how you pick your loan options.

Theo Hicks: Exactly. And you are able to get some capital expenditures covered in agency debt. Essentially, what they do is they’ll (again) provide you a loan as low as 1,25 debt service coverage ratio… So if at the current purchase price without including renovations it’s above that, then you can increase the size of your loan until it hits that 1,25, and then whatever extra you have on top above the purchase price can go towards renovations. That’s how you can get around funding at least a portion of your renovations with agency debt… Whereas for the bridge loan they’ll just do it based off of the loan to cost. There is a debt service coverage ratio requirement – I think it’s 1,1, so it’s much lower, because they understand the deal is distressed and the NOI is going to increase over time. That’s why it’s important that you have a solid business plan to show them. But it is possible to have renovations covered with agency debt, too.

Joe Fairless: Cool. And now on the equity side, real quick – equity side, the process for securing the capital… Because Theo just talked about debt, and now there’s equity to secure with your private investors, the four-step process for securing the capital. This assumes by the way, that you’ve already done the legwork to cultivate your network, your position as a thought leader, you have the team in place to have the credibility and the experience to execute the business plan… So this assumes all those other things that are in place.

Now you’ve got the deal, and what do you do? Well, you create an investment summary. There are many things you can include in the investment summary. There are the legal documents, which are the private placement memorandum, the operating agreement, the subscription agreement and a couple other things. They will have all the details and then some. It’s gonna be probably over 100 pages whenever the attorneys are done. Sources and uses, the distribution priority spelled out in detail etc. So you don’t have to replicate those legal documents, but instead just put in the relevant things, which is basically the deal, the market and the team – the good things, and any ways you are mitigating risk for each of those three. So just think about it that way – the deal, the market, the team; what are the relevant things I need to know? At the very beginning of an investment summary have a snapshot of the opportunity with the projected returns, and what the offer is to them, so what are they investing in, and then go into deal, market, team.

So number on is create that investment summary. Number two is notify investors of the new deal in a conference call. Number three is host a conference call and send the recording to the investors afterwards. I use FreeConferenceCall.com. The reason why I do a conference call instead of a webinar is multiple reasons – one, I want it to be more of a conversation, not a presentation. I want investors to be able to have the information they need in advance. That’s why I send the investment summary prior to the call, and then it should be more of a “Okay, you’ve got the information, now let us just talk about the deal and the opportunity.” I don’t wanna present something to anyone, I just wanna have a conversation about it, number one. Number two is with a conference call I can be in my office in a T-shirt, versus I’ve gotta dress up. I don’t like dressing up, so that’s another reason why I do a conference call versus something like a webinar.

So one, investment summary. Two, notify investors of a new deal and of the conference call. Three is host the call – I do FreeConferenceCall.com. You can record it, and make sure you record it and send out a link to the recording afterwards. Do a Q&A sessions at the end of the call too with the investors; that way, you answer all their questions and others can hear the questions that are being asked and the responses.

Number four is secure commitments. Obviously, you’ve gotta secure the commitments, and how you do that is you just tell them “First come, first serve.” At the beginning of Ashcroft, I had to follow up with the investors, because we didn’t have as many investors… So what I did is I asked them at the very beginning, I said “Hey, here’s the deal we’re doing. Reply to this e-mail if you’d like the investment package.” That way once they e-mailed me asking for the investment package, I knew who I had to follow up with if I didn’t hear back from them about investing.

Now I don’t need to do that because we have so much demand. I can just send out the investment package in the initial e-mail, and then whoever invests, invests, and whoever doesn’t, doesn’t, and I don’t have to follow-up with anyone.

So at the beginning you might have to be a little bit more in tune with who you’re following up with, but as your business grows and as you perform, most importantly, then you won’t have to do that. So that’s the four-step process.

Theo Hicks: Perfect. So once we’ve got the capital secured, the financing secured, and the due diligence performed, we close on the property. At that point is when you implement your business plan. So for those remaining steps, to learn more about those, purchase the book – Best Ever Apartment Syndication Book, or go to apartmentsyndication.com and we’ve got blog posts on everything we’ve talked about today, as well as blog posts on the closing and the asset management duties, and how to sell the property at the end of your business plan.

Joe Fairless: And this week still – it’s the first week of launch, so when you buy it, e-mail your receipt at info@joefairless.com and we’ll get you a bunch of free goodies, which include a couple eBooks; one is from Gene Trowbridge, who wrote a book on syndication from a securities attorney’s standpoint… And a bunch of templates and things like that that we send over to you.

Theo Hicks: Absolutely. Besides the book being launched – it’s definitely a huge accomplishment and I’m very excited about this… It’s been a very fun week.

Joe Fairless: One year. It’s been one year, too.

Theo Hicks: Yeah, it has been.

Joe Fairless: We’ve been working on this puppy for one year.

Theo Hicks: Yeah. Do you have any other updates?

Joe Fairless: Yeah. We’ve got a couple deals that we’re working on. Closing on one at the end of this month, closing on another in mid-November. Then separate from that, I play softball; I’ve been on the same team for three years… And the captain of the team, his girlfriend is a real estate agent, and she asked me if I had any insurance broker contracts for a challenging deal that she’s working on, and I gave her the person I work with. She contacted him, and because apparently she’s working on a deal – just a six-unit deal – that had some insurance challenges, and the seller ended up backing out… Well, it’s a deal that is $130,000, and I said “Send me the deal and I’ll forward it to someone I know, and I’d be happy to help you out”, that’s it.

Well, she sent it over to me… $130,000 is the purchase price, good condition, and the rents in total are $2,665. I was like, “What?! The 2% rule…” That’s incredible. I was like, “Wait a second… This is a really, really good deal.” So I sent it over to my friend who represented Colleen and I on a transaction locally… He comes at my meetup every month, and we play poker with our investor group every month, so I’ve gotten to know him really well… And I said, “Hey, here’s the deal. If you want it, great. If you wanna partner up on it, I’d be open to partnering up.” And I know I’ve said in the past that I’m not looking to do smaller stuff, so we ended up moving forward. The way I structured it with him is I am only funding the deal; that is my responsibility. So it took me about $30,000 out of pocket, I’m gonna put in the deal, and he’s gonna work on getting the loan; obviously, I’m gonna have to spend some financials for the loan and that’s gonna be a little bit of a hassle, but other than that I’m passive, and he is gonna manage it.

How we structured it is it’s gonna be 50/50, and the first $30,000 or whatever my final total ends up being that comes out of the property, goes to me. Then after I get all my money back, then the profits are split 50/50. I thought that’s a good way of structuring it, so I’m still passive and I’m not focused on it, because that’s my most important thing – I don’t want to have focus shift from what I’m doing with apartments to something else… But if I can invest some money into a smokin’ deal and I can still remain passive…

And by the way, he says it’s worth $200,000 right now… So we’ve got 70k in equity at closing. Now, I don’t know — plus or minus 10k or so, I’m sure, but… That’s a way that I’m still keeping my focus on apartment syndication and Ashcroft Capital, but then also on the side doing a deal… And how I structured it I wanted to share, because perhaps other listeners who are in a similar position where they wanna remain passive but wanna still build a portfolio, and you come across something, or someone you know comes across something smaller, structure it that way… Essentially, it’s a 0% interest loan that I’m giving to the LLC that we’re buying the property with, and then the first money out of it goes to me.

Theo Hicks: Where in Cincinnati is it located?

Joe Fairless: New Richmond, which is in flood territory, which is the challenge with the insurance… So we’re still determining if the insurance is gonna be a deal breaker or not; so we’re not sure if we’re moving forward yet, but it is under contract, and then we’ll see if things work out. He’s working on all of that stuff, I’m not focused on any of that.

Theo Hicks: That’s a solid deal. I’m sure the insurance is a little bit higher, but the gross rents are as much as the gross rents were at my fourplex which I bought for 220k, so…

Joe Fairless: We’ll see what happens, but I thought it was interesting to share how we structured it, so that it’s a win/win for both.

Theo Hicks: Perfect. Alright. Well, to wrap up, we usually do the Best Ever Podcast review of the week, but since it’s launch week for the book, I figured we’d be apt to do a book review of the week. So make sure you guys and girls pick up a copy of the book on Amazon – it is Best Ever Apartment Syndication Book. If you like the book and it’s valuable, please leave a review for your opportunity to be the review of the week that we read aloud on the podcast.

The first ever book review of the week is from CemSmiley1, who said “A must-read for anyone interested in syndication.” Their review was:

“This book truly goes step by step through the entire process of apartment syndication. There’s a lot of information, but the material is put into layman’s terms as best as can be done, and the material included within each chapter is clearly outlined, which I think will be extremely helpful for referencing.

It’s not necessarily an easy read due to so much info, but a must-have book on your shelf if you’re truly interested in getting into multifamily syndication.”

Joe Fairless: Well, that’s my wife, so we can’t use that review… [laughs]

Theo Hicks: Oh, is it really?

Joe Fairless: Yeah, that’s Colleen… So Colleen, thank you for the props on that. It is an authentic review, so I’m okay telling you that’s my wife, but we’ll use another one… Because she did read every single word in that book and she helped us during the editing process.

“I cannot recommend this book enough. I read Joe’s previous books and enjoyed them a lot. This is one is, by far, THE BEST. Filled with valuable advice from people who made it in real estate, including the author, Joe. The step-by-step method to start an apartment syndication is well laid out. The book will teach you how to build your brand, team and network. Very well-written and fun to read. Already looking forward to the next one.”

The next one?! Well, I don’t know about a next one on this… [laughs] This was a year-long process, and then some. Ellie, thank you so much for that thoughtful review. I really appreciate it. And Colleen, thank you so much for your thoughtful review; I really appreciate that. And everyone, thanks for hanging out with us. Talk to you tomorrow.

After hearing about parts one and two of the Best Ever Apartment Syndication Book, today we’ll learn some more about part three: finding and underwriting deals. To hear what to do in competitive offer situations and more great tips from Joe and Theo, tune in today!If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

Today we’re doing Follow Along Friday, and more relevant to you, we are going to give you the five factors that you should be aware of when you’re in a competitive bid situation, when you’re bidding on a deal; you have essentially five categories that you should keep in mind, and we’ll give you some tips for those categories, for how to win the deal without breaking your budget. That’s one conversation that we’ll have.

Then another conversation that we’ll have is three things to look out for whenever you’re reviewing the broker’s comps on a deal. You should always do your own comp analysis when you’re looking at a deal, but then there are three things in particular that you might not be looking at, that you definitely want to be looking at… So we’re gonna talk about that, too.

All of this is coming from the book that is going to be published on Tuesday of next week – Best Ever Apartment Syndication Book. It is 450 — did it make 50? I’m trying to think… 436, right? How many pages was that?

Joe Fairless: 456… It’s a monstrosity. It is the how-to book for raising money and buying apartment communities. If you haven’t pre-ordered it yet, then go pre-order it by going to apartmentsyndicationbook.com. That way, you get some free goodies that we’re giving away along with the book whenever you purchase it. Those are available when you pre-order, or during the first week of purchase. ApartmentSyndicationBook.com.

The previous two Fridays we have discussed 1) experience – how to get experience, knowledge, how to align yourself with experienced people and how to acquire the knowledge, and what knowledge you need to have, and also the importance of brand building and thought leadership.

That was experience, two Fridays ago, and then last Friday we talked about money – you need money to do these deals, so you can go listen to last Friday’s episode if you wanna learn about how to build a roster full of private investors who you attract into your deals. And then today we’re gonna be talking about what I mentioned earlier, which is related to the actual deal itself.

Oh, and Theo Hicks, how are you doing?

Theo Hicks: I’m doing great, Joe. How are you doing?

Joe Fairless: I’m so excited about that I just jumped right in. I didn’t even say hi to you… Although I said hi to you when we talked before we started recording. But officially, hello. How do you wanna approach this?

Theo Hicks: As you mentioned, we’re gonna have part three today of the book, which is all about finding, underwriting and sending offers on your deals. After you’ve got the experience and the private/passive money lined up, next up is start looking for deals. So in this particular episode we’re gonna focus on finding the deals and the underwriting.

For finding the deals, one of the things that you’re gonna do after you find them is underwrite them and submit an offer. Sometimes, especially in today’s market, you’re likely gonna be in a competitive offer situation, so you want to approach your offer accordingly. Most people who haven’t done a deal before probably think that the only fact that matters is the price, but in reality that’s just one of the five factors that a seller is gonna take into account when reviewing the offers and selecting the best one.

Of course, one of them is going to be price. So if you have the lowest price, all things equal, it’s not gonna look as the highest price. So when you’re submitting an offer, especially in these competitive offer situations, you wanna make sure that you’re submitting the highest price that you can for the deal to make sense from a return perspective.

Now, that doesn’t mean that just because you’re offering the highest price you’re going to win, because these other four factors are gonna be taken into account, but the price is obviously gonna be one thing the seller is gonna look at.

Joe Fairless: I know first-hand for a fact that a deal we have under contract right now, we offered $400,000 less than the other group, and we got awarded the deal. So we were not highest on the price; we were almost half a million dollars below what the highest offer was on the price, but we got awarded the deal. And we got awarded the deal because of our track record and some of these other factors that we’ll go into. And this gives hope for single-family investors who are wondering about the learning curve and the type of experiences they’ve had in single-family and how that translates into multifamily.

Well, in single-family you do get awarded deals if you show strength from a closing standpoint. If you go in with a lower offer, but the seller really needs to get out of their property, then it’s possible that you’ll get awarded the offer, versus someone who has not as proven of a track record as you. And for all the single-family home investors who have 10+ deals under their belt – I know you know what I’m talking about – you get awarded deals based on other things than price. Price is certainly a determining factor, and it depends on the seller how much of a determining factor that is… But it’s not the only factor.

Theo Hicks: Exactly. And that naturally transitions to number two, which are the terms. At the end of the day, you have to know what the seller wants – do they want to exit as quickly as possible? Do they want a non-refundable deposit? Is that something that would sway them to a direction? All-cash offers, so if they wanna close faster, then you submit an all-cash offer; they don’t have to wait for you to go through all the financing process, and they don’t have to worry about the deal not being qualified by the lender. They’ll know that “Okay, I don’t have to worry about the financing aspect, because this person is paying all cash.”

Also, something else that you can do for the terms – if they wanna close quickly, if you can waive certain due diligence items. I’m not saying you should do this, but they’re just all options that you can do. You always wanna inspect the property, but… Let’s say your team member or your partner is a commercial real estate contractor, he’s been doing this for 20+ years; instead of having a professional inspector going in there, if you’re doing an all-cash offer, you can just have your contractor look at it instead.

Of course, if you’re doing financing, you’re going to need to get an inspection and do certain due diligence items in order to qualify for the loan, but essentially, you wanna just take a look at your purchase and sale agreement, go through all the terms and see what you can do to make it more competitive, whether it be a non-refundable deposit, deposit a higher earnest deposit, shortening the closing period, all-cash offer… Things like that. Because again, if the seller wants to close faster, or have more confidence in your ability to close, you can tweak the terms to fulfill that need for them.

Joe Fairless: One thing you could also do – to build on what you said; it’s not in addition to, but it’s just a bullet point underneath – with a non-refundable earnest money deposit is instead of having that be held with the title company, if you were to be so bold, you could have that released directly (or immediately) to the seller. That way, they know that they have that money in their bank account. Because what typically happens, even if it’s non-refundable, it’s gonna be with the title company, and before the title company releases it, they’re gonna need to have the okay from both sides.

And if your non-refundable money is with the title company and then something were to come up – maybe the seller was dishonest about something, or the environmental didn’t come back clean, or the title didn’t come back clean – something that would trigger an issue that they weren’t being honest about whatever that deal point was, then what typically happens is you go to court if you can’t agree that “Hey, you weren’t being honest with me… So yeah, it was non-refundable, but you misrepresented XYZ.” And then the seller will get whatever gets agreed upon through litigation. And the seller doesn’t wanna do that, clearly, so a display of strength would be to have that money released from the title company to the seller maybe after a week, or something… Just adding in that extra talking point or that contract point, and that will definitely give your non-refundable deposit some extra credibility, compared to someone else who’s doing non-refundable for the same amount of money. So you do have your offer stand out.

Now, I’m not suggesting anyone do this, by the way. I’m simply saying what is possible, and you decide if that is the right approach for the particular deal that you’re doing. We have had buyers release their non-refundable earnest money to us on transactions, to show “Hey, we’re gonna be closing on the deal that we’re buying from you guys, and here’s our non-refundable earnest money. Now it’s in your bank account, versus it’s with a third-party.”

Theo Hicks: Yeah, absolutely. I can imagine them having cash in hand being much stronger than them having to wait to get that money until the close.

For those first two, the price and the terms – these are things you need to think about when you’re submitting your actual letter of intent. So your first offer to the seller is usually gonna be a letter of intent (LOI), which is like a non-binding agreement, just setting up expectations for the price and terms. So you’re gonna be able to put your price and your terms on there. All those things we’ve just talked about, you wanna make sure you’re thinking about those when you’re underwriting the deal, or I guess after you’ve decided that you’re gonna submit an offer after underwriting; make sure you’re doing this upfront, and not doing it best and final, or kind of waiting until the end and holding all of your cards to your chest… Especially in a competitive situation, of course.

Number three is going to be relationships. Everyone knows how important relationships are in real estate. We might have talked about this last week, but when you’re looking for real estate brokers, you shouldn’t expect them to send you their best off-market deals after knowing them for a week. Once you know them for a while and you’ve proven that you’re able to close on deals, you’ll just start getting better and better deals from them.

The same thing works for when you’re actually submitting offers. If you know the listing broker, if you know the owner, you’re gonna have an advantage over someone that they don’t know, because as Joe mentioned in the intro, a track record is gonna be very important, and if they know you and they know your track record, you’re gonna have an advantage over someone that they don’t know at all, they’ve just met, if your offer is the exact same.

Joe Fairless: So the question you might be asking is “Okay, what if I just am going in cold? It’s a deal I’ve found on LoopNet, or it’s a deal that I am making an offer on because it’s just an on-market deal…” One tip for you in that case is to ask the listing broker if he/she has any preferred mortgage brokers for this transaction… Because at least then, you’re aligning yourself with someone who the listing broker knows well, and maybe has some sort of agreement, side agreement, or who knows what they’re doing behind the scenes. But at least you’re going into it with a familiar ally of the listing broker.

Theo Hicks: Exactly.

Joe Fairless: And anyone can do that. All you have to do is ask. Now, you don’t necessarily have to go with that mortgage broker, but if you’re open to seeing different terms, and if the mortgage broker who the listing broker is recommending is similar or better than the other options you’ve got, then it’s a no-brainer; you go with that and it will likely help you get awarded the deal, if all the other things are equal.

Theo Hicks: Exactly. On that same note, back to building relationships – it’s not as good as what you’ve just said, it’s kind of a tier below, but if you’re wanting to build a relationship with a specific real estate broker and you find an off-market deal or whatever, and obviously, they’re not gonna be involved in the process, you can use their mortgage broker or their property management company if they have all that included in their company, just to kind of push that relationship in a positive direction.

Number four – this is one that you might not even have thought about, but your team structure. Some owners, for example, won’t sell to a general partner that doesn’t have their own in-house property management company, for example. So if you have a third-party property management company, they might not sell to you or they might not be as competitive as if you’ve had your own in-house company. It might be true, but it also might be false, but the perception is that your company is not as integrated.

Remember, at the end of the day they wanna know that you are credible and that you are able to close on a deal. So if you have an integrated company, it kind of proves that you have that track record.

I remember a long time ago we talked about when you should bring on an in-house management company, and it’s once you have a large enough portfolio for it to make financial sense. So it’s perceived that you’re big enough that you have your in-house property management company.

Another example – and I believe we talked about this last week, with the alignment of interests – is also what other roles are your team members playing in the deal. Do you just have a property management company managing the property and that’s it? Or are they investors in the deal? Do they have equity in the deal? Have they brought on their own investors? Are they a loan guarantor? Who is your loan guarantor? Is it some other local owner who has experience, or are you just doing all this yourself? All those things are gonna come up during the best and final seller call if you get to that point; they’re gonna ask you about your team structure – who’s your property management company, are they third-party or in-house, who’s your lender? If you have a consultant, or some sort of mentor, or you’re partnered with a local owner, you wanna mention that.

So your entire team structure is something that could be a huge selling point for the deal, especially when you’re just starting off fresh and don’t have any experience.

Joe Fairless: We’ve lost out on a deal because we have a third-party management company. The seller went with another group that had similar terms (it sounded like; I don’t know for certain). They said that since we did not have an in-house management company, that they felt more comfortable with the company that did. That is not typical, but it did happen, and that’s why we included this in these factors.

Also, thinking about team structure, where you’re getting your equity – they’re team members, too. So the seller is certainly gonna be qualifying you and your equity partner or partners, asking you “Okay, have your equity partners reviewed the deal? Have they visited the property? Do they need to visit the property? If they don’t work out, where are you gonna get the equity? Have you ever partnered with those equity partners on previous deals? If so, how many?” Those are all the questions that you should be prepared to answer, and then some.

In the book we have all the questions — well, not all; I guess we’d never technically be able to have all, because people come up with random stuff… But most of the questions you should be prepared to answer during the conversation with the broker, and then also on the best and final call with the seller.

Theo Hicks: Number five, the last factor is your underwriting. Essentially, are you able to identify extra value-add opportunities, which are things that will either increase the revenue or decrease the expenses – so are you able to identify extra value-add opportunities that other people that are submitting offers are not finding? Because at the end of the day, if you can have a higher NOI, which means you have a lower expense or a higher income, then you can submit a higher offer.

This kind of ties back into the price, but the better you’ll get at underwriting, the better you’ll get at identifying value-add opportunities on properties, and the better team members you have that can do that as well, then the higher offers you’re gonna be able to submit.

And again, since price is one of the factors, if you become an underwriting wizard, and a wizard at identifying these opportunities, then you’re gonna be able to essentially win it. If you’re good enough at this, you could win almost every deal, because you’re gonna be able to submit a price that’s so much higher than everyone else’s, because you know you’re gonna recapture all that after you’ve implemented your business plan.

Joe Fairless: So what’s an example, Theo?

Theo Hicks: Instead of doing coin-operating laundry in the laundry facility, you put laundry into the actual units and raise the rents on each individual unit. We actually have a list of (I think it’s) 27 ways to add value to apartment communities. If you just google “Joe Fairless 27 ways to add value”, you’ll find that blog post, and those two things that I’ve mentioned, the washer and dryer, and the carports are on there, but it’s also a list of 25 other ways to add value. Essentially, you just wanna be creative with it.

Another example – I can’t remember who you interviewed, but they would increase their advertising budget a little bit, because they would host these resident appreciation parties constantly, with raffles, and just very engaging… So because of that, they were at like 99% occupancy. So instead of underwriting a 5%-8% vacancy rate, they could underwrite a 1% vacancy rate. I’m not saying you should do this, because you have to prove that you can do this first, but they’ve proven that they can maintain essentially a 100% economic occupancy by bumping up their advertising budget. So when that happens, when you underwrite and you’re 4%-6% extra revenue each month, you can submit a much higher offer.

These are all things to keep in mind, and as you’re listening to the podcasts — you could even listen to a podcast by someone who’s not an apartment investor and find an idea of a value-add opportunity… Just being creative, and of course, it takes time as well.

Joe Fairless: When I was getting started, I read a book by Dolf de Roos called Commercial Real Estate Investing – he talks about all sorts of different ways to add value, not just to apartment buildings, but to commercial real estate in general.

Theo Hicks: So before we move on, just to summarize – the five factors that will win, or result in you winning or losing a deal in a competitive offer situation is the price, the terms, your relationships with the seller and/or listing broker, how you structured your team and you communicate that, as well as your underwriting skills. So those are the five factors to keep in mind when you’re submitting an offer in competitive offer situations.

The second thing you wanted to talk about has to do with the actual underwriting process. When you’re underwriting your deals – let’s say it’s an on-market apartment deal – there will be an offering memorandum, which is the listing broker’s sales package; I’m sure everyone who has looked at apartment deals before has seen one of these… It essentially summarizes the offering and talks about the property description, and the market… But then it also has a proforma section where they talk about their expected projections for the property from a financial perspective. And also they’ll have their rental comps, which is what they use to calculate the new rents once the renovations are completed [unintelligible [00:23:10].02] raise the market rents. So here are three things to look for when you’re reviewing the rental comps from the listing broker.

As Joe mentioned before, you wanna do your own comps, but you can technically use theirs as long as you address these three questions first, and make sure that the answer is correct and they’re not trying to pull a fast one out of you. Question number one you wanna ask yourself is how far are these comps from the subject property? The mileage is important, because if they’re 40 miles away and it’s in a massive market, then it’s probably not gonna be a good comp. But more importantly, you wanna make sure that the subject property and the comp property are located in like areas.

If you like anywhere near downtown area, you know that one street could be an A and two blocks over could be a D area. So technically, when you look at the comp map and you might be like “Oh, these properties are one mile apart, so I don’t need to investigate further”, but if you end up investigating further, you’ll realize that one property is right next to a college, and the other property has a really high crime rate. So yeah, they’re close, but they’re not actually comps, because those neighborhoods are completely different, which means that the demographic is gonna be completely different.

So that’s one question, looking at the distance between the two properties and making sure the actual neighborhoods line up.

Number two – and I know Joe has mentioned this before, but this is a big one – is when was the property renovated? If you’re doing a value-add deal and you are going to base your rent premiums on the proven rents they’ve received by doing similar updates to the interiors, you wanna make sure that those were 1) done recently (within the past year), and 2) make sure that they’ve actually done enough, and done it at a rate similar to how quickly you’re gonna renovate them.

For example, a comp that has renovated five units in the past two years is a lot different than a comp that’s renovated five units in the past two months. So if they’ve renovated five units in the past two months, then you can expect to receive similar rental premiums, but if it’s been two years ago, who knows what the actual rent premiums are going to be, and you can’t necessarily rely on that data, because it didn’t happen fast enough… Unless of course you plan on renovating five in two years.

Joe Fairless: And these two points came from a deal that we were looking at. The deal was in Anderson, which is a suburb of Cincinnati, and they showed rent comps that were in areas called Norwood, which is not Anderson, and it’s completely different, and far away relatively speaking… And then the renovations looked good, but they’d been doing them over a two-year timeframe, and that’s not the timeframe that we do renovations; we want all the renovations done within 12 to 16-18 months. We want all of them done. They’d only done 10% within two years… But we want all of them done, definitely, within two years.

As a result, that doesn’t really give proof of what the market can command, because it’s just over too much of a timeframe. There’s all sorts of different variables that could have happened; they could have offered concessions, and now the concessions are burned off… They could have just been turned down by 75 people, and then the 78th person said “Yeah, I’ll buy it” because they had some weird circumstance, or they had to move in quickly and they had the ability to pay a little bit more. So you wanna see more of a pattern. That’s where the two came from, from an actual deal.

Theo Hicks: And then the third one is you want to ask yourself “Do the property operations match?” What I mean by property operations, one example would be the utilities – who pays for water, who pays for electric, who pays for gas? If the owner of the subject property, the owner pays for just water, and you plan on just paying for water as well, and the residents pay for their own electric and/or gas, and then you go look at the rental comps and you have a rental comp where the owner pays for everything, then those rents are gonna be completely different… Because if you’re including the utilities in the rent, it’s gonna be higher.

So if you’re listing a unit for rent and saying “All utilities included”, not only is someone going to rent that unit faster, but you’re gonna be able to demand a higher rate, because of the cost savings associated with saving $50-$100/month on utilities.

Another example from a property operations perspective is move-in specials. When you’re doing a rental comp analysis and you’re calling up or visiting these properties in person, you want to ask what type of concessions they’re offering; because if their rents are $50 higher than all the other rental comps in the area, and you call them up and they say “Yeah, we’re offering first month rent-free”, then in reality it’s not actually $50 higher, it’s actually lower, because they’re giving away free rent… So you’re gonna be able to demand a higher rent if you’re giving away first month’s rent free, reduced security deposit, referral fees, things like that.

So make sure that the types of concessions that are offered are similar at both properties. They don’t have to be exact, but just use common sense, and if one property has some crazy rent special and yours doesn’t, then you probably should pass on that rental comp and find another one.

Joe Fairless: But use that information as something you want to dig into more, because if someone’s doing major concessions in your submarket, then that could be a red flag.

Theo Hicks: Exactly.

Joe Fairless: One other thing – I have noticed on the 30 to 100 units that brokers will be more inclined to put all-bills-paid properties into the rent comps when comparing if their property is not all bills paid… Whereas 100+ units – you might have a more sophisticated buyer. I haven’t seen any brokers put all-bills-paid properties in the rent comps if their subject property was not all bills paid. But I have seen it multiple times with 30 to 100 units.

So if you’re buying in the 30 to 100 or 20 to 100 units, then be on the lookout for that, and just make sure you’re comparing apples to apples, because as Theo said, all-bills-paid properties, rent per square foot and overall rent will be through the roof compared to a non-all-bills-paid property.

Theo Hicks: In the book, when we go over the rental comps, we go over a lot more than this. We tell you exactly how to do rental comp investigation online, how to do it over the phone, and how to do it in person, to kind of cover all bases.

So just to summarize quickly, the three things to look out for when you’re reviewing the broker’s rental comps is 1) look at the distance between the subject property and the rental comp, and make sure that they’re in alike areas/neighborhoods. 2) Looking at the renovation timeline and making sure that the renovation timeline that they’ve used is comparable to how quickly you’re gonna do your renovations. And then finally, making sure the property operations are similar, as well.

That wraps up part three of the deal. Next week we’re gonna talk about the execution. Once you’ve submitted the offer on a deal, now it’s time to actually start executing your business plan, which starts with due diligence, and then closing, and then your asset management responsibilities. So we’ll be talking about a couple of topics as it relates to those.

I’m really excited for this book to be coming out next Tuesday.

Joe Fairless: Yeah, I am, too. I’m excited for how helpful it will be, and quite frankly, for us just to be done with it. [laughs] This has been a year in the making, and it’s been a labor of love for both of us, but now it’s time to give birth and kind of let the baby do its thing. Nothing else in the marketplace is out there that addresses the how-to guide for apartment syndication… So go to apartmentsyndicationbook.com and make sure you get the free goodies too, because we’ve got a bunch of good stuff that will be helpful for you when you pre-order, or order during the first week. The first week – that deadline is September 18th. By September 18th you’ll be eligible for all the free goodies if you go to apartmentsyndicationbook.com. And you’ve gotta e-mail the receipt to info@joefairless.com.

Theo Hicks: Alright. Well, to wrap up, make sure you go to the Best Ever Community on Facebook – that’s BestEverCommunity.com. Each week we post a question of the week, and we use your responses to create a blog post.

This week’s question is “What is your greatest strength and how has it helped you as a real estate investor?” So what are you really good at and how has it been beneficial to your real estate investing career?

Joe Fairless: What’s yours?

Theo Hicks: Well, I was thinking about that, and I would say now — I’m not sure what the word would be, but I’ll just say my biggest strength is I don’t panic anymore. So if anything goes wrong, instead of having that moment of like “Oh my god, the world’s ending!”, I’ll just be like “Alright, it is what it is” and then with a clear mind I’ll come up with a solution quickly, rather than thinking about it constantly and letting it affect other aspects of my life. So kind of just — I guess a better term would be compartmentalize, so I can not think about it, and then once something comes up and I need to do it, I can turn everything else off, focus on that and do it. Once it’s done, I can turn that back off and go back to doing whatever else I’m doing, without letting it stress me out.

I wanna say that this is a newer ability. I did not have this when I first started off at all. I was the exact opposite. I’d be having a minor stroke for a year straight.

Joe Fairless: It is quite the skillset to be able to compartmentalize so that you are focusing on one thing and then knocking that out, because there is incredible power and focus, that’s for sure… And it’s something more and more people lack because of social media and just the way we operate with our smartphones, and being pulled in a lot of different directions; it’s the lack of focus. But when we do have focus towards something, it’s very powerful.

I would say mine is resourcefulness. I believe that whatever comes across my way, I’ll find a solution. Sometimes it’s not the solution that is most desirable, but I’m incredibly resourceful, and that has served me well as an entrepreneur; I make things happen, and it’s just something I’ve always had, and applying it to what we do has been very beneficial.

Theo Hicks: I would agree, you are very resourceful. And then lastly, make sure you subscribe to the podcast on iTunes and leave a review for the opportunity to be the review of the week. This week’s review is from LegacyDriven. The title of the review is “Be a sponge.” The content of the review is “I say ‘Be a sponge’, because I’ve listened to this podcast for about six months, and the knowledge I have gained is hard to believe. Since listening, I’ve rented my home that I was going to sell, and getting positive cashflow, too. I’m excited about acquiring more units and acquiring more knowledge with Joe along the way.”

Joe Fairless: That’s great. Congrats on renting that house out and getting some cashflow. What a huge difference that will be… That will have a ripple effect. Throw a stone in a pond and see the ripples; those ripples are all the positive actions that will take place as a result of you renting your place out and cash-flowing, versus buying a place and “upgrading” into a bigger and better place… Instead you did the right thing, in my opinion, based on me not knowing you — but generally speaking, you did the right thing to cash-flow, and then congrats on your future goals and looking forward to hearing more about how you do.

Thank you, everyone, for hanging out with us. I am confident that this was valuable if you’re raising money, buying apartments, or just an investor in general who’s looking to enter into any of these areas. And if not, then why are you still listening right now? [laughs] You should have turned it off a long time ago.

I sincerely appreciate the review by LegacyDriven. Powerful name, I like it! LegacyDriven, thank you for that review, and everyone else, please leave a review in iTunes to help us continue to have a high quality for you and everyone else. We’ll talk to you tomorrow.

Follow Along Friday is back and we’re talkin’ the latest book release again. Joe and Theo are going to tell us about part 2 of the Best Ever Apartment Syndication Book, which is all about raising money. Get an insight to the value this book will bring you by listening in on this episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

We’ve got an episode today that will help you attract private capital by aligning yourself with the right team members, especially if you have little experience and little credibility in the industry. Last week we talked about the experience component and how important that is, so this week we’re talking about the ways to attract private capital, as well as to attract the right team members who then help you attract private capital.

It’s a four-part series, and this episode is inspired by the book; it’s not out yet, but it’s available to pre-order. So you can go to ApartmentSyndicationBook.com, pre-order it… You’ve got a bunch of goodies when you pre-order it. Just e-mail the receipt to info@JoeFairless.com and you’ll get all those goodies.

Last week we talked about experience, this week we’re talking about credibility and attracting private money. Let’s get rockin’.

Theo Hicks: As Joe mentioned, last week, the first part, we talked about making sure you have the experience requirements before becoming a syndicator… So it’s having preferably both – past business experience and past real estate experience, but if you’re attempting to do your first apartment syndication, you’ve never done one before, you’re still gonna face a credibility problem in the face of potential passive investors, because if you’ve never done apartment syndication before, they’re gonna want to be confident that you’re gonna be able to return their capital.

So before you even find private money investors, you’re gonna need to address that credibility problem, and that’s where finding experienced team members comes in. That’s why one of the parts of the money part of the book is building your actual team. There’s a lot of different team members you need – you need a property management company, a real estate broker, you need attorneys, a mortgage broker, accountants…

In this episode we’re gonna focus particularly on the real estate broker, and we’re gonna go over some ways to win them over.

Joe Fairless: That is the challenge at the beginning; I know I had it at the beginning whenever I had broker conversations… I thought I was riding on my high horse with four single-family homes that I had at the time, and I thought for sure they would all just fall over and fight to talk to me, since I had these four single-family homes. Not at all… At all, at all, at all. [laughs] They were not very interested in talking to me, because I had four single-family homes, since I did not have experience with apartment communities.

So I personally came across this challenge. I wish I had this episode to listen to whenever I was going through this challenge, because it would have made it a much more seamless transition, and I would have been able to attract brokers quicker, I would have been able to grow faster, in a more effective way… But I didn’t. However, you do, so here are four tactics you can use to attract the best brokers in the market that you selected.

Theo Hicks: Yes. And the idea behind these four tactics is to put yourself in the mind of the broker and ask yourself “What do they want?” and based off what they want, how can you show them that you can get them what they want? At the end of the day, they wanna make their commission; in order to make their commission, they have to be confident that once they find a deal, the person they send it to has the ability to close. So since you’ve never closed on a deal before, you can’t leverage your past experience; instead, you can do these four things to prove to the broker that you are going to be able to close on a deal.

The first one, kind of obvious, but just pay them a consulting fee. So instead of waiting to pay them after closing on a deal, offer to pay them a couple hundred dollars an hour for their time. So if you are visiting properties with them, if you’re having conversations on the phone with them, log that time and offer to pay them a consulting fee.

Joe Fairless: I actually don’t think that’s obvious at all. I didn’t know of anyone who had offered that, and I forget the guest – maybe you remember the guest who mentioned this. He’s in the Carolinas, I believe.

Theo Hicks: Yeah, his name was T.

Joe Fairless: T, yes. He’s a broker. When he mentioned that, I’d never heard of it, and I’ve mentioned in a couple presentations when I’ve spoken at some conferences, and I hadn’t heard of anyone who had heard of it whenever I spoke about it… So I think that’s great, and it’s such a quality investment of a thousand dollars. A thousand dollars is a lot of money, but so is the rapport that you build with a top broker in the market, because you’re likely going to be making more than the thousand dollars; you’re likely gonna be making a hundred times more than that, or ten times more than that, or whatever size your deal is. So it’s a really good investment, in my opinion.

Theo Hicks: Number two is when you’re having a conversation with a broker, one thing you wanna do is ask them “How many properties have you sold in the past year?” and when they tell you that number, ask them for the actual addresses of these properties, go visit them in person, and take a look at the condition of the property, the location, the size… Anything that can let the broker know whether that specific property aligns with your business plan.

So you’ll visit the property and then you’ll follow up with your broker – either a phone call or an e-mail – and say “Hey, I went and visited your property at ABC Street. Really good deal. Here’s what I liked about it, here’s what I didn’t like about it.” Number one, it’s showing them that you’re proactively going out there and looking at deals, but two, it also gives them a better idea of the type of deal you’re looking for… Because some brokers might specialize in a specific type of deal, where other brokers might just look at any deal that comes in, no matter what the size or the asset class. So it’ll give a better understanding of the type of deals you’re looking for.

On a similar note, kind of a hybrid of this, is to do the same thing, but when they send you deals. So when they send you deals and you underwrite it, instead of just disqualifying the deal because it doesn’t meet your return goals, instead of just saying nothing, e-mail the broker and tell them what you liked about the deal and what you didn’t like about the deal, and why it was disqualified.

Essentially, look at the deals they’re sending you or the deals they previously sold, and tell them what you did and didn’t like about those deals as it relates to your business plan.

Number three is to provide them with information on how you’re going to fund the deal. Once you find your mortgage broker and you’ve had a conversation with them, reach out to your broker and say “Hey, I talked to ABC mortgage broker.” Once you fill out the personal financial statement or once they’ve told you you qualify for a deal, tell your broker that “We qualified for financing.”

Also let them know how you’re gonna actually pay for the down payment, so explain to them how you’re having conversations with passive investors, tell them how much money in verbal commitment you’ve had… Then also, since you’re probably not gonna be able to qualify for the loan yourself, let them know that you’re having a conversation with people who are verbally interested in signing on the loan and being a loan guarantor.

Essentially, anything that has to do with how you’re going to fund the deal or how you’re gonna qualify for financing, follow up with the broker and let them know and keep them updated.

Joe Fairless: And I would push this into number 1, or 1.b, because if they don’t have the confidence that you’re gonna close, none of this stuff matters unless you’re paying them the consulting fee, or by the hour.

My suggestion is to proactively address how you have access to capital or how you have capital yourself. That way it addresses the 10,000 pound gorilla in the room… Or elephant! I almost said monkey, and I was like “That’s a really heavy monkey…” Because they’re gonna be thinking about it the whole time you’re talking, “Can this person close? This is a great conversation, they’re nice, but can they close? Can they close? Can they close?” So just proactively address that one.

Theo Hicks: Exactly. I’m actually in the process of having real estate broker conversations. We actually talked to a guy yesterday, and that’s exactly what we do. When we give them our background, we mention exactly what we’ve done – not only our real estate background and our business background, but what exactly we’ve done in regards to syndications… So do we have a financing lined up? Do we have private capital lined up? Who do we have on our team so far? And just mention all that stuff up front, and then follow up with updates as you go.

As Joe mentioned, if you don’t address that from the beginning, they’re not gonna take you seriously at all, because they’re not gonna know if you have any of those things lined up.

So that’s kind of leading into number four, which is constantly follow up with your broker. You’ve got two ways – number one, drive to their properties and let them know what you liked about the properties, and number two, provide them with information on how you’re funding the deal… And any other update that you can provide to them that will show you you’re getting closer and closer to being able to close on a deal, you want to send that to them.

Every week or every two weeks make sure you’re constantly in contact with these brokers, letting them know that you’re taking action.

Joe Fairless: And there’s certainly a fine line there, with being a nuisance to being someone who’s proactively following up… And my suggestion is it’s what Theo mentioned at the beginning of our conversation – put yourself in their shoes; would you want someone e-mailing you weekly, saying “Hey, got a deal? Got a deal? Got a deal? Got a deal? Got a deal?” No, you don’t want that.

But would you want someone who you’ve told that you’ll follow up with them when you have a deal, and you also introduced them to some team members – would you want someone to follow up with you and say “By the way, thanks a lot for the recommendation, for introducing me to so-and-so. I spoke to her, and I’m likely gonna be bringing her on my team as well. Do you happen to have any recommendations for XYZ?” Maybe it’s a title company, maybe it’s something else. And the answer is yes, the broker would be usually totally good with that, because the broker knows that this is a relationship business, so when he/she is referring other team members of theirs out to potential clients, then they look good too to the title companies, to the attorneys etc. And it’s good to know their contacts are being actually contacted by the person…

So add value when you follow up. It’s important. Otherwise, it’s gonna have the opposite effect of what you’re intending.

Theo Hicks: Exactly. So these are four ways to win over the real estate broker that we’re gonna talk about today. In the book we follow a similar process and provide a similar explanation for the other team members, so how you win over the property management company, how do you find the correct accountant, and how do you talk to mortgage brokers – all that is also covered in the book. On this episode we’re touching on the real estate broker aspect.

Joe Fairless: Cool. And in ten seconds or less, what are the four things again?

Theo Hicks: Consulting fee, number one; so pay then. Number two is drive to their recent sales and tell them what you do and don’t like about that property. Number three is provide some information on how you’re going to fund the deal, and number four is constantly follow-up with new information and added value.

Joe Fairless: Cool.

Theo Hicks: So once you have the team lined up, and you have the credibility that comes from the team, now it’s time to find private capital.

Joe Fairless: Yup. And the challenge with private capital initially is your track record (or lack thereof). I’ve mentioned this multiple times, but the disclaimer one more time is I’m not suggesting that everyone should raise private capital. I am assuming at this point that you have the experience and the knowledge in order to safely navigate a deal to as what would be expected for the industry.

So if you’re just starting out, I don’t recommend raising private capital. But assuming that you’ve got some sort of knowledge, then this will help you gain that alignment of interest with team members so that you can attract the private capital.

Whenever I was starting out, that was a big challenge that I had, too; four single-family homes doesn’t amount to much from an experience standpoint, so instead, on the first deal, what I did is I had the brokers put in their commission into the deal, and they were part owners with us in the deal. What that allowed me to do is to speak to my private investors and say “Yeah, I don’t have the experience, but the brokers have four decades, five decades (or whatever it was) of experience, and they’re partnering with us on the deal because they like it so much. That went a really long way.

Essentially, what you’ll need to do is you’ll need to find some people who can address that experience challenge that you’re ultimately gonna come across when you’re starting out, and you will give up a portion of the deal – that’s just how it is – or a whole chunk of the deal, but who cares, because you’re getting that track record. So it’s important to have that mindset of “Yeah, I’m gonna give up a decent amount of the deal, but it’s gonna get me in the door.” This is a temporary challenge, and once this is addressed, after a couple deals or maybe even one deal, then I won’t have to do that, or I won’t have to do it as much as I used to.

Theo Hicks: These are all things that you can leverage when having the conversation with your passive investors, and saying “Hey, you’re investing money in the deal, I’m investing my own money in the deal, and I’ve got alignment of interest with my team members” based off of the five things that I’m going to explain right now, of how you can have alignment of interest with your team members.

These start from the lowest to the highest level of alignment of interests, and you can do this with different team members. The first level or the lowest level of alignment of interest is just bringing on the qualified team members. As you’ve mentioned before, bringing on a qualified real estate broker, bringing on a sponsor or a mentor, or bringing on a qualified property management company on your team.

Joe Fairless: Or all of them.

Theo Hicks: Of course, you need all those people… So that’s number one – bringing on a qualified team member. But that’s the lowest, because they don’t really have any skin in the game whatsoever; they’re just helping you manage the deal.

Number two is you bring on this qualified team member and then you give them a percentage of the general partnership. So you bring them on and you offer them a percentage of the general partnership; this is number two. The reason why it’s not higher is because they still actually don’t have skin in the game. Yeah, the amount of money they’ll make is based off of the success of the deal, but they’re not gonna lose any money… Which is why the next tier up, number three, is bringing on a qualified team member, giving them a percentage of the general partnership because of their investment of money in the deal. So just giving it away to them, and now they’re gonna invest their money in the deal for that chunk of the general partnership, so now they actually have skin in the game.

Joe Fairless: But the money is treated as limited partnership money… But as part of the negotiation, you say “Yeah, if you also invest in the deal, then you can be in the GP because of your track record.”

Theo Hicks: Exactly. So now they have skin in the game. The fourth level is the previous three levels, but they’re also having other people that they know bring money into the deal. So they’re having their own investors invest in the deal.

Actually, when you’re having initial conversations with your real estate broker or your property management company, that’s a question that you can ask. You can ask them “Do you have investors who would be interested in investing in apartment deals?” I’ve asked every property management company and real estate broker I’ve talked to that question, and much to my surprise, they all said they do have people who are willing to invest in these types of deals. I was actually surprised when they said that, because I didn’t know. I figured that maybe it’d be 50/50, but all of them have said it so far.

Joe Fairless: Wow, it’s interesting…

Theo Hicks: So again, number four is bring on the team member, having them invest and having someone on their team or someone that they know invest as well. And the fifth is having them actually sign on the loan, so having them be a loan guarantor. That way, they’ve got a lot of skin in the game – they’ve got their money in the game, they’ve got their personal finances in the game…

So if you tell your investors that “I’m investing in the deal. I’ve got qualified team members who are investing in the deal, they’re bringing on people to invest in the deal, and they’re signing on the loan”, that’s pretty impressive.

Joe Fairless: You just locked it up, yeah. You just locked it up, the credibility, absolutely, when you do that.

Theo Hicks: So for these five levels, as I’ve mentioned, they’re going from lowest to highest alignment of interest, but there are three team members that can do any of these five. You’ve got your real estate broker, a sponsor or a mentor, a consultant, and your property management company.

For those three, the property management company would result in the highest level of alignment of interests, because there’s not only alignment of interest through bringing on money, bringing on other people’s money, signing the loan, but they’re also involved in the day-to-day operations of the deal.

The next would be a sponsor, because they’re not gonna be involved in the day-to-day operations of the deal, but they do have experience, so you can leverage that and tell your passive investors “Hey, I’ve got this sponsor who’s got 1,500 units in this area. They’re investing in the deal and they’re gonna allow me to ask them questions if anything were to come up.”

And then the one that is the lowest is the real estate broker, just because they’re obviously signing off on the deal up front, but once they get their commission, they’re not necessarily involved in the deal any longer, besides making the money based off of which tier of alignment of interest they’ve decided to pursue.

Joe Fairless: And a bonus one, number six, would be to give the property management company a little bit less than what they were wanting on a monthly basis, but then back-load that once you achieve your metrics that are in the proforma, and give them a bonus that is twice as much as what they would have made with that whatever you lowered it by.

Let’s say you lower it by $100,000, because they were gonna make a certain percentage, but now they’re gonna make 100k less over five years as a result of the fees; however, when they help you achieve the metrics by effectively managing the property, they receive a bonus of 200k in five years, or in two years when you do a refinance, or a supplemental loan.

That will show alignment of interests with the deal, because the property management company gets a bonus, and it also does not give them any equity in it; you just have to have some sort of contract drafted up that shows those terms.

Theo Hicks: Exactly. And then also, it’s essentially a value-add opportunity, because when you underwrite the deal, if you’re lowering that property management expense, your expenses are going down, so the ongoing cash-on-cash return is going to be higher, and then instead of paying that off each year, you’re just paying off that big chunk of equity you make at the end.

Joe Fairless: Yeah. It can actually help you on the acquisition front too, because you can underwrite it a little bit differently than what other people are underwriting, because your expenses are lower than what other people’s expenses are. You just don’t have as much upside on the back-end, because you’re giving them a bonus… So as long as the numbers work on the back-end, that could be a way to get a deal that perhaps you wouldn’t have gotten otherwise, because you were underwriting it differently.

Theo Hicks: Exactly. So that’s the approach you wanna go with how to have that conversation with the property management company up front during the interview process. To quickly summarize, the six different ways to create alignment of interest with your team members, going from lowest to highest, is number one, bring on a qualified team member with a property management company resulting in the highest, followed by a sponsor or a mentor, followed by the real estate broker.

Number two is to give them a percentage of the GP. Number three is to have them invest as limited partner in the deal. Number four is to have them bring on other people to invest as limited partners in the deal. Number four, have them sign the loan, and number six, reduce their ongoing payment and double or triple it at sale.

Joe Fairless: Or some sort of capital event, if you do a refinance or supplemental loan. Great stuff. Got any updates this week?

Theo Hicks: I don’t. What about you?

Joe Fairless: I decided to sell the three homes, but there’s a wrinkle in the plan, and that is I looked at the leases. They expire this coming summer, so we’re basically 12 months away… Therefore what we’re doing is we are sharing the deals with our property management company, who said they might have investors who are interested… So there you go.

If you look at the 1% or 2% rule, they’re 0.7% across the board… So it wouldn’t be as much cashflow. I’m not sure if an investor would want it… Who knows, we’ll see. I really don’t care. If not, then I’ll just sit on them for 8, 9 months and then sell them retail next summer.

Theo Hicks: Yeah, that’s an advantage of having the single-family rentals, unless of course the lease isn’t expiring for a while.. But you can sell it to live there as a regular homeowner, or you can sell it to an investor, so you kind of have a larger market.

Joe Fairless: Yeah. The only reason I’m doing it I’ve got 349k trapped in those homes in equity, and I make like $250/month maybe, in total from those three homes, because if there’s repairs, or a tree falls on a car or something like that… And plus the liability of having those homes… It’s time to take those and put that money into our deals.

Theo Hicks: Are you allowed to 1031 into a passive investment?

Joe Fairless: Technically, yes, you are… For our group, we don’t accept 1031’s unless it’s 3 million or more, because we’ve gotta restructure the whole kit and caboodle, and it’s just not worth all that brain power from attorneys and us, and coordination, logistics… So if one of our investors asks us if they can 1031 into our deals, the answer is if it’s 3 million or more.

However, we do 1031’s from one deal to another, and we have, but we just don’t accept outside 1031’s that are not our deals. So I could not 1031 my proceeds from these homes into one of our deals, because it’s missing one zero at the end.

Theo Hicks: It makes sense. Okay, I hope you sell those puppies and get to invest that money into the next deal. If not, then I guess [unintelligible [00:26:27].03] opportunity to sell them in the next year.

Joe Fairless: Yup.

Theo Hicks: Alright, so before I conclude, make sure everyone listening, guys and girls, goes to the Best Ever Show community on Facebook. That’s BestEverCommunity.com. We’ve got over 1,000 active real estate investors asking questions, posting content and responding to our Best Ever Community questions of the week, where we will take your answers and create blog posts.

This week’s question is what year do you think the next downturn/recession/market correction will happen, and why? I’m looking forward to reading your responses and your predictions on when the next correction/recession/whatever terminology you prefer to use, is going to happen. We will take all the responses and create a blog post next week.

Joe Fairless: My favorite so far has been — I can’t remember who it was, but he said something like “I don’t know, it’s just speculation. No one knows.”

Theo Hicks: Yeah… It’s all speculation.

Joe Fairless: Yeah, and then someone said “Amen!” and I liked that, because… Who knows? More importantly, make sure that our investments, your investments are set up to handle a market correction. That’s more important. Why try to time it? It’s fun to talk about it, I guess, but why not just set it up so you’re gonna mitigate risk as much as possible along the way?

Theo Hicks: It was Julia, and she said “No one knows, and it’s a futile exercise.”

Theo Hicks: Everyone knows every single year, every single month, every single day there’s someone writing an article saying the crash is coming tomorrow, it’s gonna be the biggest crash of all time. People have been saying that ever since there was a market to crash, so… As she said, probably a futile exercise; make sure you’re set up for success no matter what the market is.

Joe Fairless: It’s a good conversation, and perhaps that’s why we posted it, but I agree with Julia, who knows…? But just set yourself up the right way so you mitigate risk, and we’ve talked about that – you just google “three immutable laws of real estate investing joe fairless” and that’s how you do it.

Theo Hicks: Exactly. Alright, and then lastly, everyone, guys and girls, please subscribe to the podcast on iTunes and leave a review for the opportunity to be the review of the week. This week’s review comes from Shae Carr, with the title “I’m a fan.” Their comment was:

“Informative, short and to the point. This podcast is enjoyable and truthful. Thanks for sharing your tips with the world.”

Joe Fairless: Well, thank you, Shae. I appreciate you spending some time and investing that into writing the review, and thank you for listening, and I’m glad you’re getting a lot of value from it. Please everyone leave a review; that will help us get high-quality content, and help you out ultimately.

Thanks for listening, thanks for hanging out, and we’ll talk to you tomorrow.

Today’s Follow Along Friday is based on the new book Joe and Theo wrote, Best Ever Apartment Syndication Book. The book is broken down into four parts, today they discuss part one, the experience. Hear what you can do to gain experience or find someone who has the experience to partner with for your first apartment syndication. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

We’ve got some information that I think is gonna be pretty helpful for you if you are looking to raise money and buy apartment communities, or even separate those two – if you’re looking to raise money and do something else real estate-related… Or you’re just looking to buy apartment communities with your own money, this is gonna be relevant. We’re gonna be talking about what you need prior to raising the money. This is inspired by the book that Theo and I wrote, and is being published September 10th, but it is available right now for pre-order. You can go to ApartmentSyndicationBook.com, and when you pre-order the book, you will receive a free eBook from Gene Trowbridge. His book is called “It’s a Whole New Business: The How-To Book of Syndicated Investment Real Estate.” That’s the eBook that you’ll get when you pre-order our book, and you’ll also get some other goodies, too. Seth Williams is providing an eBook, and you’ll get some different calculators and things that we use in our business. So go to ApartmentSyndicationBook.com.

The book is in four parts, that’s how we’ve structured it. Part one is the experience, so what do you need to know and put in place prior to raising money. Part two is finding the money or attracting the money. Three is the deal, and four is the execution. So today we’re gonna be talking about the experience.

Certainly, in the short period of time that we have, we won’t be able to go through everything that’s in the book, but we’ll touch on some important aspects, and it’s not to promote the book — well, it kind of is to promote the book, but the objective of our conversation right now is to provide you with actionable information, so regardless of if you buy the book, this conversation will still be helpful for you… So what’s the best way to approach this, Theo?

Theo Hicks: As Joe has mentioned, the book is broken into four different parts, and the idea is to show you not only what to do, but how to actually do it, as well. So there’s exercises that you’ll actually do throughout the book that will add value and will bring you one step closer to actually doing a deal… But each of the four parts are kind of broken into subparts, and they’re in order of essentially how you go from where you are right now, to by the end doing your first deal.

In regards to the experience, that’s actually broken into four parts. It’s broken into knowledge, goals, brand building, and then market evaluation. I think the best way to approach the conversation is to kind of go through those four, the first one being knowledge. A good place to start and one of the things that we do talk about are what are the requirements you need before you even start this process? Because unfortunately, not just anyone could just automatically start up the process of learning, and then once they know what they’re doing, raise money. There’s a couple of other requirements that you’ll need beforehand… So I think that will be a good starting point.

Joe Fairless: Yeah, I agree, because we’ll see books that say “You can do deals and partner with other people without any experience and without any money, and it is possible to do that”, but there’s a caveat, and that is you’ll need knowledge. If you don’t have experience and you don’t have money, you need knowledge in order to make sure 1) that you’re structuring the deal for yourself properly, but most importantly, you’re structuring the deal with others properly.

So the two requirements to become an apartment syndicator — it’s actually an and/or… That is either real estate experience and/or business experience. I should say that it’s more than just experience with business. It should be a track record of accomplishments, because if you’re just starting out, then maybe you don’t have that real estate experience… But if you are a successful salesperson in an organization, who has been promoted 3-4 times within 3, 4, 5, 6 years, then that says something about how you’re savvy in business and how you know how to hone a craft… And that’s a requirement for what we do, and that’s a requirement for being successful in any business.

So look at your experience and give yourself an honest assessment of “Have you excelled within your current professional career?” and if so, what does that look like? What milestones have you achieved that perhaps are not typical for others in your industry who have been in that industry for that same period of time? And if you haven’t, and you also don’t have any real estate experience, it’s my opinion that apartment syndication is not for you at this moment. However, if you can start learning the process, learning the fundamentals, learning the lingo, and then get experience by interning for someone, and then build your track record that way while offering to do things for free for others, then you’ll be able to build a track record and ultimately you’ll check the box for what you need prior to becoming an apartment syndicator, and that is some sort of real estate background and/or a professional business background where you have accomplished things that are not typical for others in your professional industry.

Theo Hicks: And something else that’s important… At the end of the book, this assessment that Joe’s talking about — we actually walk you through an assessment where you analyze your real estate and business background and give yourself a rating, and then based off of where you fall on that scale, we kind of give you some advice on how to move forward. Obviously, if you have a very strong rating, then you can move forward; if not, as Joe mentioned, you’ll need to actually work on gaining experience in real estate or business. It doesn’t have to be something in apartments, or you don’t have to be a CEO of a company; the idea is you need to have some sort of background that when you’re going to people and asking them for money, they are gonna ask you “Why would I give you money? What’s your background?” and you have to be able to tell them something.

And part two, the money – another part of that, because your private investors are gonna be kind of on your team. Once you analyze and figure out what your background is and what your strengths are, you’ll wanna kind of complement those with other team members. That’s gonna be what we talk about in part two, building your core real estate team… But just as an example, if you have a really strong business background, you’ve got a lot of business contacts of high net worth individuals, that’s really good because you’ll have that money aspect covered, but… They don’t really know how to asset manage or how to operate a deal or how to underwrite a deal, so if that’s the case, then you can complement that by finding a really strong property management company, which you wanna do regardless… Maybe bring on a partner or a sponsor. And of course, vice-versa, if you have a really strong real estate background, you might not necessarily have a lot of relationships with people that have high net worths, or people in the business world that would invest with you passively… So from that standpoint, you might need to bring on a partner who raises money, and you just do all the operations.

Joe Fairless: Yeah, and everyone’s got some assets that they’re working with, and I talk about that at the beginning of the book, and I talk about it in a way that perhaps you might not have thought of before in terms of the assets that we all have… And as an exercise or preparing to launch a book and put any finishing touches on this book, I was up last night — one, I could really sleep, but then two, I was just reading reviews of other people’s books in the real estate category, and I was reading the negative reviews. A lot of the negative reviews on other people’s books – they could be grouped in certain ways, and one of the groupings was “Yeah, this works for so-and-so person, but my market’s different”, or “This person invested at the right time in 2008, but now deals are hard to come by.”

There’s always gonna be an advantage for when you jump in and do this, and there’s always gonna be disadvantages. There’s always gonna be advantages for what you can bring to the table initially, and there’s also gonna be areas that you’ve gotta shore up. And the sad thing about reviews like that, where people say “Hey, they started at the right time in 2008, or 2009, or their market is better than mine” is that the reviewer doesn’t realize that they do have assets, they’re just different assets from perhaps the author, or other investors.

For example, we all live in either a deal market, or a money market. We all live in a market that either has deals, or we live in a market that has a bunch of rich people… And it’s important to recognize if you’re in a deal market or a money market, and then approach accordingly, because you can leverage that. If you’re in a deal market, then great – you build a platform, which we talk about in the Experience section, where you attract investors… And if you live in a money market, then great, you leverage those connections that you have and you go partner up, or you go do some research and you find a market that makes sense that cash-flows.

So there’s always gonna be some challenges, but there’s also always a solution. That’s a core belief I’ve always had – there’s always a solution. We might not like the solution, but there’s always a way to work things out. I whole-heartedly believe that, and I really am proud of my resourcefulness because of that belief, and my resourcefulness comes because I believe that.

And then one thing that you mentioned, Theo, I just wanna touch on… You said find investors and ask them for money, and I just want to tweak that a little bit, and I wanna say we wanna attract investors, and we wanna offer them opportunities. I never ever, even at the beginning, have asked people for money, ever; instead — actually, I take that back. On my first deal I didn’t have the $50,000 for the earnest money, so I did ask one of the investors to put it up first, and then I wrote him a personal guarantee. But besides that, in terms of the opportunities and the deals, we have an opportunity where we offer it to other people; we don’t ask them for money. I’m not harping on you, I’m just making note of this thought process, because this is an important thought process… And it’s really for section two, but we were talking about it now, so I figured I’d bring it up.

We attract investors, we attract other team members… And in the book, we talk about how do you become attractive in order to attract those attractive partners? Because ultimately, in order to attract attractive partners, we have to be attractive, too. And when we think about raising money and our different opportunities, if an investor who reaches out through my website and he/she asks me on an introductory call “Okay, tell me why I should invest with you”, I take a step back and I say “Have you seen information on Ashcroft Capital that I sent you prior to our conversation?” Then they’d say “Yes”, and I’d say “Well, do you have any specific questions about that?” because ultimately, that would be the best approach for our conversation, versus me trying to talk about things that I’m not sure that you have or haven’t already looked at…

Theo Hicks: Exactly.

Joe Fairless: And I never will force-feed investors or anyone information about our company, but rather I will attract them into the business, and then as a result of that, the conversation is so much smoother, and that is the importance of having a thought leadership platform. This happens rarely, but yesterday I had three investor calls, and one of the three — this is the part that happens rarely, three new investor calls; they all sent submissions to the website… I have a couple at least a day.

One of them, he said “Are you affiliated with Ashferd?” I’m like “Ashferd…?” I said, “Ashcroft?” He’s like “Yeah. I came across your info I think on the internet, or something…” So he wasn’t familiar with me, didn’t know my background… And that conversation was much longer than what’s typical — which is fine; I’m just commenting on the differences between an investor who doesn’t have knowledge about your thought leadership platform and who you are, versus an investor who does, who maybe listens to this podcast or attends our conference in Denver, or any number of things; reads books, or listened to other people’s podcast and just heard me interviewed. That conversation is so much smoother, because I’ve already established some sort of track record and credibility with them prior to the conversation… And building the brand is part of part one in our book, and there are ways you can do that outside of just having a podcast, but having that conversation with someone and they already know a little bit about you is so much smoother, especially in our business… Because we’re in the business of capital preservation, and then hopefully we grow it, which we’re in real state, and if you do the fundamentals of real estate, then you probably will.

Theo Hicks: Yes, that’s a lot of good information. From the small number of conversations I’ve had with potential investors, I could agree with exactly what you’re saying. I know we’re gonna talk about this a lot more in part two, but most of the time, it’s something that they kind of bring up, and they’re really passionate and excited about… Like, “Wait, I can do that…?” They don’t even realize that it’s something that’s possible for them to do; they just think that they can invest in stocks, or their 401k, and that’s it.

So you mentioned the brand building, and that’s another part of part one… In reality, you can start building your brand right away. If you don’t have that experience we’ve talked about earlier, this could be one of the ways that you could work towards gaining that experience and credibility. The brand allows you to meet potential team members, or as Joe said, attract potential team members, and the amount of opportunities that would come from that are really countless, and some of them you wouldn’t even think about.

We have a large section in the book talking about exactly how you go about building your brand, and as Joe mentioned, it’s not just creating a podcast… It could be a YouTube channel, a meetup group, a newsletter, conferences… You can kind of go through all of it.

Something else that’s important for this foundation before you go into raising money is, number one, you have to understand how you actually make money, so that you can set a goal. One of the things that we talk about is the importance of focusing on the cash-on-cash return and the internal rate of return for apartment syndications.

If you haven’t invested in apartments before, you might not know what the internal rate of return is. Basically, it’s a return that’s based off of time. Of course, a dollar today is gonna be worth more than a dollar five years from now, and the internal rate of return takes time into account when it’s calculating the returns… So that’s what your investors are gonna be looking at, or what your investors will likely look at when they’re analyzing your deals, so you’re gonna let them know how that number is calculated and what it means.

You also wanna know about the cash-on-cash return, because that’s another thing your investors are gonna look at… But also for yourself, because at the end of the day you’re doing this to likely reach some sort of goal, and a part of that goal is gonna be a financial goal. So once you understand how you make money, which we go over in the book, something that you wanna do is set a 12-month or 24-month or a 5-year goal, that’s gonna be a specific number. And instead of just saying “I wanna make a million dollars this year”, and stopping there, we go through a process of figuring out exactly what you need to do to hit that goal, and the fact that we use is the amount of money that you need to raise.

So once you understand how the returns work and how you make money, you can kind of back-track and calculate exactly how much money you need to raise in order to hit your goal. That will help you lead into part two, when you start reaching out for commitments, and you’ll know how many commitments you need to have before you start actually looking for deals.

Joe Fairless: The mistake a lot of people make who are starting in the apartment syndication business is they say “I wanna make X amount passively a month.” You’re not making anything passively a month, because you’re the general partner; however, the ways you can make ongoing cashflow as an active investor in a business would be investing as a limited partner in your deals, number one. Your money is treated the same as all your other investor’s money. Two is asset management fees. However, as you grow your company, those fees will likely need to be allocated towards you building out your staff and your team to support the amount of properties that you have.

I guess the cashflow from the general partnership, too. The reason why I didn’t mention that is because we tend to keep our returns, the GP returns, from a cashflow standpoint, in a bank account, just to be conservative, and then when we do some sort of capital event – a supplemental, or a refinance, or when we exit – then we would catch up… But we like to just provide the limited partners their returns, and usually we’ll keep our cashflow from the GP split in the deal, just to be a little bit more conservative.

So because of that, the way to look at it is looking at the acquisition fee, and then reverse-engineering from there. That’s how we arrive at the number. And I suggest doing a 12-month goal over the 24-month, and holding yourself accountable to the 12-month… And then also having a vision for five to ten years later. But that’s gonna change. Assuming that you have a solid, quantifiable 12-month goal, once you get that first deal or a couple deals done to achieve that 12-month goal, things are gonna snowball, and it’s likely that that 5-year goal or the 10-year goal will need to be updated, because you’re getting a lot farther, faster than you thought you would.

Theo Hicks: Exactly. Something else – and if you’re a loyal Best Ever listeners of course you know this, but you wanna have your specific, quantifiable 12-month goal, as Joe mentioned; that’s like kind of your number, but you also wanna at least have an idea of kind of why you want to achieve that goal.

We have in the book an exercise that will walk you through how to create a long-term vision. We ask you questions about what gets you excited about real estate, how will you benefit by achieving this goal…? So kind of the positives. At the same time, we’re also driven by things that we’re afraid of, that disgust us; we also go into questions about “What happens if you don’t achieve this goal? What’s your life gonna be like?” or “How would you feel if you didn’t achieve this goal?” or “How do you currently feel about not achieving this goal and what are some consequences you faced?”

Essentially, we’re creating a vision that we can go towards, but at the same time something that we’re also running away from, and something that we don’t wanna [unintelligible [00:20:50].06] So you’ve got those two things working for you, in a combination with your actual monetary goal, and combined, that will give you the inspiration to push through when things get tough.

Joe Fairless: When I became an entrepreneur, a full-time real estate investor, I put a document together with my goals, and I was working with Tony Robbins’ coach Trevor McGregor, who I still work with today, and I wrote down what will happen when I achieve my goals – I think it was to buy an apartment community; I think that was my goal – and I said “I’ll be able to have some more financial flexibility, and I’ll be able to finally launch a business that is mine, and I won’t be relying on an employer to send me a paycheck every two weeks”, but then I also put what will happen if I don’t achieve my goal… And I wrote “I will be thoroughly embarrassed, because I’ll have to go back to my job, tail between my legs, work back in an industry (advertising) that I didn’t like anymore. I’ll be humiliated, because I told everyone, including family and friends, that I’m gone, I’m not doing this anymore and I’m now focused on real estate.” And both the pain and the pleasure of associating that to your goals is incredibly important, and I still do that today… So here’s what I want to achieve and here’s what I’ll receive and others will receive as a result of me achieving it. Here’s how their life will be better, here’s the ripple effect…

But then here are the negative consequences to not achieving it. And it’s great, because when you do goal-setting, you’re usually incredibly inspired, and rah-rah, and high fives to everyone, “I’m gonna conquer this world”, but then four, five, six months later, twelve months later or whenever, you go through a lull, and it’s important to be able to pick that up and be inspired, but perhaps you also need to be disgusted by what would happen if you don’t achieve it. We need to have both those forces working in tandem to inspire us and keep us going.

Theo Hicks: Yes, and something that’s interesting in what you said there is when you were talking about when you left your job, that one of the things that would have disgusted you is the feeling of embarrassment of having to go back… Now, what I’m going to say is not advising people to just quit their jobs right now, with no plan whatsoever, but I think there is something to the concept of burning bridges… Because if you have your full-time job while you’re trying to be a real estate investor, you might be more timid, and be like “Well, I could pursue this really hard, but I still have this paycheck coming in”, so you might not pursue it as hard… But if you don’t have a job, and the only way you’re gonna make money and put food on the table is by doing a deal, or by getting your act together and working 40-60 hours/week – I think there’s something behind that.

For me personally, when I left my full-time job, I had a plan, and of course, I had done things in the years leading up to kind of prepare myself for it, but there’s never gonna be the perfect time to leave; you kind of just have to have faith and just do it, and then trust that you have the ability to be resourceful enough to get the job done… But again, it’s important to do the assessment we talked about earlier, and make sure that you actually can, and be realistic with yourself… Kind of look in your past and be like, “Alright, so when I left something before, without a full picture, was I able to be resourceful enough to figure it out?” Because at the end of the day, you’re gonna have your plan to quit your job and to do real estate full-time, and think you know exactly what’s gonna happen 100%, but this is not how it’s gonna work out…

So again, as long as you have some sort of idea, and you’ve done an assessment and truly believe and truly know that you are resourceful enough to figure it out, and you’ve got multiple backup plans in place, then my personal philosophy is just go for it, if I’m being honest… With all those caveats, of course.

Joe Fairless: Yeah, and that’s a whole other conversation… But yeah, there’s different approaches there. You put your back against the wall, fight or flight; some people fight and they work through it, and some people fly away and bad things happen to their family and their business, and all that… So pros and cons, and that’s a whole other conversation.

Theo Hicks: Yeah. So the last part before you start to go out and raise money is to figure out where you’re actually going to invest. As Joe mentioned earlier, you’re either in a deal market or a money market. If you’re in a deal market, then that market that you live in could be your target investment market. But if it’s not, you need to know that before you start going out and raising money and looking for deals. So the last part before you actually go out and start raising money and looking for deals is to figure out what market you’re gonna target.

Another section we have in the book focuses on what to look for in a market and exactly how we evaluate potential investment markets. Then something else that Joe mentioned in the beginning was how one of the objections that he came across when looking at reviews was people saying “Oh, well this person started after 2008. The market that he was in was great. Right now the market is not as great, so I can’t find good deals”, or things like that… So we also go over the three immutable laws of real estate investing, which if you’re a Best Ever listener, you’ve heard us talk about that before. Essentially, those are the laws that apply to any market. If you follow those laws, you’ll be able to not only survive, but potentially even thrive, and in any type of real estate market, whether it’s at is peak or at its low.

Joe Fairless: And just for clarification, because you mentioned market to identify the city, but then you said market to identify the real estate cycle… So those are two separate things that we go over. One is identify the city that you’re investing in, and then separately (but related) is the real estate cycle that you’re in. If you’ve listened to this podcast, you’ve heard me interview economists before, and one of them – I asked her after she talked about what we should do (buy, sell etc.), I said “Well, what if we just buy for cashflow, have long-term debt, and have adequate cash reserves?” She’s like, “Well, yeah, then you can hold on to it. Don’t sell. You’re set up well.” So doing those three things is what we talk about, regardless of the real estate cycle.

Certainly, you’re gonna buy more during the down, and you will sell more during the high, but you can continue to buy during all parts of the real estate cycle, as long as you buy for cashflow, have long-term debt, and have adequate cash reserves.

Theo Hicks: Exactly. So just to review, we talked about part one of the four-part process/system for completing your first apartment syndication deal. Within part one there’s four subsections, and the first one is the knowledge – so we talked about the experience you need before you even start this process. Then once you have that experience, you’re gonna wanna learn more about apartment syndications; that’s understanding the lingo so you can communicate, as well as what you’re supposed to focus on.

Once you have the knowledge aspect covered, the next two parts are to set your goals, so that’s setting your 12-month financial goal, but also a long-term vision, which is something that is going to inspire you, but also something to run away from, something disgusts you at the same time, so you have both those forces working for you… As well as building your brand, and we’ve talked about how the purpose of the brand is to attract these team members, attract passive capital, and also to build up your credibility, because that’s gonna be very helpful when you’re having these conversations, if people know who you are versus not knowing who you are.

And then finally, before you start going out to raise actual capital, you wanna figure out what real estate market or what city you’re going to invest it, or what one or two cities you’re going to invest in, and also make sure that you are aware of the three immutable laws of real estate investing that Joe mentioned, which is buy for cashflow, long-term debt, and have adequate cash reserves, so that you’re able to survive and likely thrive in any part of the real estate cycle.

Joe Fairless: Awesome. Cool. And go to ApartmentSyndicationBook.com to pre-order, and you can get a bunch of free goodies, too.

Theo Hicks: So on that topic – I know something you wanted to talk about was a couple e-mails that you’ve received…

Joe Fairless: You know what, I’m gonna have a separate episode on that.

Theo Hicks: Perfect. Something else that you wanted to talk about was your single-family portfolio that you have…

Joe Fairless: Yes, I had an epiphany last night while I was up late, looking at online reviews for other people’s books to make sure we had everything covered for ours, and I realized that my three homes are worth about 170k each, and $222,000 is what I bought them for, and they’re worth, I believe, about $510,000 now. Those are the three homes.

I have $161,000 in debt on those loans – total mortgage balance for those three. So $510,000 value, $161,000 in mortgages, so that’s in equity about $349,000. Guess how much I’m making a month on these three homes?

Theo Hicks: $400.

Joe Fairless: Like, nothing. Zero. A tree just fell down and hit the tenant’s car… So I don’t even know what we’re gonna do with the insurance; I have to talk to the insurance company about that, and also to the property management company… But in terms of the tree, it was $870 to get removed. There goes all the profits for all three homes, because it’s about $250/month that I make, but that’s on a best-case month.

So I’m looking at this and I’m like “I have about 350k worth of equity in these homes and I’m making nothing every month…” I know they have sentimental value, but holy cow… I started looking at if I were to sell, and let’s just say after the dust settles I get like 250k, factoring in taxes and other stuff; this is a really, really rough math. Fees, commissions, all that. 250k, at 8%, which when I invested in our deals, which is what I would do, I would just put more into our deals, at 8%, because we do an 8% preferred return, that’s $20,000/year, divided by 12, that’s $1,666. I’d change that number just so it doesn’t have three sixes in it, so I’d figure something out… But that’s $1,600/month, and 20k a year that I could be making if I were to invest in one of my own deals this money.

Now, I already invest in our deals, but I’ve got these three homes, so I’m considering it… I haven’t decided yet. My sister is a real estate agent in Dallas, Fort Worth, so I’ve got a call with her tomorrow and we’re gonna talk about it. I might sell individually, I might sell as a portfolio… They’d cash-flow for another investor if everything goes perfectly, but I’m not a fan of single-family homes. I haven’t bought any since 2012 or 2011.

I also see this as my largest vulnerability for being sued… Because I have these residents who live there, and if I get sued — I’m covered with insurance and I’m fine with that, but I just wanna remove that variable of vulnerability from a legal standpoint, too. I get that I could put the properties in an LLC and there might be a due on sale clause that’s triggered, so… I’ve just gotta kind of work through that, but I think I might be doing something with these three homes.

Theo Hicks: Yeah, because if you have $250,000 in equity you could buy —

Joe Fairless: 349k, but then with just rough math, I’m knocking out a hundred for taxes and such…

Theo Hicks: So technically, you could also buy a 1.2 million dollar apartment…

Joe Fairless: I’m not gonna do that… I’m not gonna do that at all; no, no, no… Yeah, I could 1031 into something else and just grow from there, but I have no desire, zero, negative desire to do that. I would be investing in our deals, otherwise I would go insane with having to buy that type of property, that small of a property, on the side, while we’re doing the Ashcroft stuff.

Theo Hicks: Well, I’m looking forward to hearing what you end up doing with those properties. I know you’ve had them for a while, and as you’ve mentioned, they probably have sentimental value, but… If you’re not getting any return on them, it’s understandable that you’re gonna pull that equity out and get that 8% pref… It’s 8%. I mean, that’s a solid return.

Theo Hicks: Alright, so I don’t have any updates, so let’s transition into closing. Everyone make sure you go to the Best Ever Community on Facebook; that’s BestEverCommunity.com. Join the conversation with — we’re up to over 1,500 active real estate members now. Each week we post a question of the week and write a blog post based off of your responses.

This week’s question is gonna be “What was your worst deal ever?” We wanna know what year that deal was in, and then tell us a story about why it was your worst deal.

Personally, I don’t think I’ve had a worst deal yet. They’ve all been — not the best deals ever, but…

Joe Fairless: Well, we’ve gotta get you one then. Hurry up and buy something.

Theo Hicks: Yeah, I’ve gotta buy a really crappy deal, so I can answer that question on Facebook… But yeah, just go on there and tell us a story about your worst deal, why it was your worst deal, and then also what you’ve done to mitigate the risk of that happening again in the future.

Joe Fairless: Cool.

Theo Hicks: And then lastly, please go to the podcast on iTunes and subscribe and leave a review for the opportunity to be the review of the week. Another great review this week from — most people don’t put their names… I’ll just say from B. I think it’s just a random amalgamation of letters… But they said that the podcast is the perfect commute soundtrack. Their review was “The Best Ever podcast has replaced the music and talk radio I used to listen to on my way to and from work. This has become my daily soundtrack. In addition to teaching me a trove of invaluable, profitable lessons, it’s also taught me what to look for in a real estate investment opportunity, especially what a bad deal might look like. There are lots of opportunities out there to invest in, but Joe and his guest will teach you what questions to ask, the common pitfalls and oversights that some syndicators fail to recognize, and how to minimize your risk. You’d be lucky to be able to get this kind of coaching by paying for it, but here it is for free.”

Joe Fairless: Well, and you talked about the bad deals, and that’s perfect for what the question of the week is at BestEverCommunity.com. Feel free to participate there and you’ll not only get to share your worst deal, but then also hear from others, and we’ll do a blog post on that to summarize all of that. That will be available at TheBestEverBlog.com.

Well, thank you so much for writing that review, and I’m glad you got a lot of value from our podcast. Everyone, thanks so much for hanging out with us. I hope this added a lot of value to your business, and ultimately your life. We will talk to you tomorrow!

Today Joe invites his co-author Theo Hicks to partner in his Follow Along Friday podcast episode. They talk about the book and crushing Google’s algorithm for supply. Hear their thoughts on keeping in touch professionally with others, and an attempt to wholesale properties. Don’t miss this one!

Joe shares how you can get his new book along with the bonus guide! He talks about the Get Motivated seminar which is nationwide and how he extracted goodness from the event. He shares his investments and current deals, tune in!

The Best Real Estate Investing Advice Ever Book: Volume 1 is available for pre-order! Click to order NOW so you get the BONUS mentioned in this podcast episode: https://amzn.com/B01GQFYMN8

Here are 9 things you’ll discover in the book (plus, LOTS more):

1. How to transition from single family to multifamily properties 2. Step-by-step approach on raising money for your deals 3. How to creatively invest in real estate, no matter how bad your current financial situation is 4. Step-by-step approach for using market data to perform due diligence 5. The most overlooked expenses by buy-and-hold and fix-and-flip investors 6. Step-by-step blueprint for how to achieve financial independence 7. A step-by-step process for how to successfully wholesale probate properties 8. How lenders evaluate your loan application and what to do to get rid of it 9. A creative financing method for newbie investors

PLUS, ALL PROFITS FROM BOOK SALES ARE BEING DONATED TO JUNIOR ACHIEVEMENT. Help yourself by getting the book, and help kids in under-served communities at the same time.

Joe shares how to host a free event and get more attendees. He states the importance of being transparent with the attendee’s money. First your events should be free, then later you can charge a very small amount as you gain credibility. Joe shares news about his Dallas apartment community, his new book, and his brother’s military promotion.

Joe updates us with all his apartment community closings, his brother’s honorable Army advancement, and the new website! Be sure to submit us your testimonials of the show to info@joefairless.com. Best Ever Tweet: Continue to move forward. Please Take 4 Min and Rate and Review the Best Ever Show in iTunes. Listen to all episodes and get a FREE crash course on real estate investing at: http://www.joefairless.com Sponsored by: Door Devil – visit http://www.doordevil.com and enter “bestever” to get an exclusive 20% discount on your purchase. Subscribe to Joe’s YouTube Channel here to learn multifamily and raising money tips: https://www.youtube.com/channel/UCwTzctSEMu4L0tKN2b_esfg Subscribe in iTunes and Stitcher so you don’t miss an episode!

You know who she is, Shark Tank’s star, Barbara Corcoran, is a
huge influencer in the investing space and Joe was able to grab her
endorsement for his new book. Joe has interviewed many high-profile
individuals and shares how he was able to contact these VIPs, turn
up the volume to hear how he did it and how you can do it
too!

I recommend talking to Lima One Capital. A Best Ever
Guest told me about them after I asked how he financed 10
properties in one year. They are an asset-based lender with unique
programs for long-term hold and fix and flippers.

Click to
learn more or, better yet, reach out to Cortney Newmans at Lima
One Capital. His cell is 404.824.6121.

Today Joe shares with us all the successes and goals he has in his life, like closing on a large apartment community and updating his vision board. He shares with us a piece of a book he is reading where it prompts readers to hire an admin before a sales rep and why you should do so. Joe shares why it is OK to update your vision board over time, tune in and follow along!

I recommend talking to Lima One Capital. A Best Ever Guest told me about them after I asked how he financed 10 properties in one year. They are an asset-based lender with unique programs for long-term hold and fix and flippers.

Click to learn more or, better yet, reach out to Cortney Newmans at Lima One Capital. His cell is 404.824.6121.

Money is a commodity. It doesn’t do anything unless it goes to work investing in something. What you are selling is the prize. Act accordingly.

You have a crocodile brain. And so do your clients.

You must make the message:

New, novel and intriguing

Tease the solution to their problem but wait to give solution until later

Tell a story – don’t focus on analytics

When pitching remember the acronym, STRONG

Set the frame

Tell the story

Reveal the intrigue

Offer the prize

Nail the hookpoint

Get the deal

Immediately secure “frame control” by using light humor and defiance

Every meeting you should establish what Oren calls “frame control.” Essentially frame control is being the alpha in the meeting even when there are alphas already present. The frame is like an empty picture frame that we see the world through. If we have frame control then people see our view of the world through our frame.

He does this by using light humor and toying with the other people in the meeting while showing defiance is necessary (see page 33 of his book)

Don’t establish rapport. Establish “local star power”.

According to Oren, he thinks rapport is overrated. He’s never won a deal by having small talk at the beginning of the meeting because that small talk’s purpose is to determine who has the frame control in the meeting.Some bonus takeaways:

You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors. We make funding your projects easy so you can focus on what you do best…rehabilitating homes. Learn more athttp://www.fundthatflip.com/bestever.

Zillow is all over home buyer data, and Joe breaks down an unpredictable excerpt of one of the firm’s latest publication, The New Rules of Real Estate. Hear how the authors are able to predict an area’s appreciation, and which home renovation will land you the most value…can you guess? Hint, it’s not the living room!

Patch of Land – Could you do more deals if you had more money? Let the crowdfunding platform, Patch of Land, find investors for you and fund your next deal…and your next deal…and your next deal…and…well, just go find out more at http://www.PatchOfLand.com

You’re about to have a lot of fun learning about boat and mini storage unit investing, seller financing, a book I immediately bought after he mentioned it and two ways to become financially free in 7 – 10 years, plus much, much, much…much more.